Economics
Corporate Bonds
Corporate bonds are debt securities issued by corporations to raise capital. Investors who purchase these bonds are essentially lending money to the company in exchange for periodic interest payments and the return of the bond's face value at maturity. Corporate bonds are typically considered to have higher yields than government bonds, but they also carry a higher risk of default.
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9 Key excerpts on "Corporate Bonds"
eBook - ePubInvesting in Fixed Income Securities
Understanding the Bond Market
- Gary Strumeyer(Author)
- 2012(Publication Date)
- Wiley(Publisher)
Chapter 11
Corporate Bonds
Michael Bruno, Gary StrumeyerO ver the past number of years we have seen a steady increase in the holdings of Corporate Bonds by retail investors. This phenomenon is more than just an increase in mutual fund purchases. Rather, it is indicative of the individual investor purchasing Corporate Bonds directly from friendly bond brokers. According to the Federal Reserve, the percentage of household assets in corporate and foreign bonds grew 70 percent between 1995 and 1999. It is surprising that U.S. households now hold more corporate and foreign debt than they do municipal bonds, commonly thought of as the retail investor’s safe haven.By purchasing bonds directly, the investor is in fact cutting out the middleman, avoiding the annual management fees charged by funds and money managers alike. However, there is no free lunch. The investor is now charged with understanding and navigating this complex marketplace. Upon completing this chapter the reader will be on his or her way to becoming an educated and successful corporate bond investor.WHAT IS A CORPORATE BOND?
Like governments and governmental agencies, corporations of all sizes and types issue public debt. Many corporations take advantage of private issuance and sell certain bond issues directly to large, financially sophisticated organizations such as life insurance companies and pension funds. These transactions are registered with the Securities and Exchange Commission (SEC) differently from the way public bonds are issued and sold. Such issues are regulated under Rule 144A of the SEC.The holder of a corporate bond typically expects the company that issued the bond to make regular interest payments (the coupon) and to repay the principal amount of the loan (the par amount) when the bond matures. Under the terms of the bond offering, the corporation is obligated to make these payments. Compared to the corporation’s stockholders, its bondholders have a priority claim over the assets of the corporation. Legally, the corporation must pay its bondholders the promised coupon interest on all of its outstanding bonds before any funds are declared as dividends to stockholders. From that point, the holders of the corporation’s preferred stock, if any has been issued, have priority over the holders of its common stock. This fact often leads the corporation’s less sophisticated bondholders to falsely believe they will always receive their promised interest payments and principal.
- Edwin J. Elton, Martin J. Gruber, Stephen J. Brown, William N. Goetzmann(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
Corporate Bonds Corporate Bonds are generally similar to government bonds in pay- ment pattern. They promise to pay interest at periodic intervals and to return principal at a CHAPTER 2 FINANCIAL SECURITIES 15 4 Treasury bonds issued after 1985 do not contain call provisions. 5 The tax implications of different coupon rates can also explain differences in yield; this will be discussed in later chapters. Taxable equivalent yield = Tax exempt municipal yield 1 Marginal tax rate - - fixed date. The major difference is that these bonds are issued by business entities and thus have a risk of default. Corporate Bonds are rated as to quality by several agencies, the best known of which are Standard and Poor’s and Moody’s. 6 Corporate Bonds differ in risk not only because of differences in the probability of default of the issuing corporations but also because of differences in the nature of their claims on the assets and earnings of the issuing corporations. For example, secured bonds have spe- cific collateral backing them in the event of bankruptcy, whereas unsecured Corporate Bonds (called debentures) do not. An additional class of bonds called subordinated debentures not only have no specific collateral but also have a still lower priority claim on assets in the event of default than unsubordinated debentures. In an attempt to gain some protection against bankruptcy, Corporate Bonds typically place certain restrictions on management behavior as part of the loan agreement (called the bond indenture). Such restrictions might include limiting the payment of dividends or the addition of new debt. Another notable feature of Corporate Bonds is that they are most often callable, which means that corporations can force the holder of the bond to surrender them at a fixed price (usually above the price at which the bonds were initially sold) during a set period of time.
eBook - PDFBonds
A Concise Guide for Investors
- M. Choudhry(Author)
- 2006(Publication Date)
- Palgrave Macmillan(Publisher)
If the borrower fails to pay interest on the loan as it is due, or to repay the principal on maturity, this is known as default and the borrower will be in breach of the terms of the issue. 1 This is a serious event. In the event of default bondholders are entitled to enforce payment via the legal process and the courts. As providers of debt finance, bondholders rank higher than preferred and ordi- nary shareholders in the event of a wind-up of the company. Depending on the level of the security associated with the particular bond issue, bond- holders may rank ahead of other creditors. The issue of the credit risk of a specific issuer is the key concern for corporate bond investors. Corporate Bonds, Eurobonds, credit quality 89 Figure 5.1 Sterling non-government bond issuance Source: BoE 1997 1998 1999 40 35 30 25 20 15 10 5 0 £ billion Short-dated Medium-dated Long-dated The yield on Corporate Bonds is set by the market and reflects the credit quality of the issuer of the paper, as well as the other considerations rele- vant to price setting such as level of liquidity, yield on similar bonds, supply and demand and general market conditions. Yields are always at a spread above the similar maturity government bond. A well-received corporate bond will trade at a relatively low spread over the government yield curve. Although the common perception is that bonds are held by investors for their income, and are less price volatile than equities, this is an over-generalisation. Certain bonds are highly volatile, while others are held for their anticipated price appreciation. Certain corporate issues are aimed at only the professional (institutional) market and have minimum denominations of US$10,000 or £10,000. Generally however they are issued in denominations of US$1,000 (or £1,000, €1,000 and so on). In the US domestic market the par value for Corporate Bonds is sometimes taken to be US$1,000 instead of the more conventional US$100.
eBook - PDF- Scott Besley, Eugene Brigham, Scott Besley(Authors)
- 2021(Publication Date)
- Cengage Learning EMEA(Publisher)
127 CHAPTER 6: Bonds (Debt)—Characteristics and Valuation Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. The two principal types of munis are revenue bonds and general obligation bonds. Revenue bonds are used to raise funds for projects that will generate revenues that contribute to payment of interest and the repayment of the debt, such as a roadway that generates revenues through tolls. General obligation bonds are backed by the government’s ability to tax its citizens; special taxes or tax increases are used to generate the funds needed to service such bonds. Generally, the interest income an investor earns from munis is exempt from federal taxes. 2. As the name implies, Corporate Bonds are issued by businesses called corporations. A corporate bond issue generally is advertised, offered to the public, and sold to many different investors. The interest rate typically remains fixed, although the popularity of floating- rate bonds has grown during the past couple of decades. Several types of corpo- rate bonds exist, the more important of which are discussed in the remainder of this section. 3. With a mortgage bond, the corporation pledges certain tangible (real) assets as security, or collateral, for the bond. In addition to original, or first, mortgages, firms can issue second-mortgage bonds secured by the same assets. In the event of liquida- tion, the holders of these second mortgage bonds (called junior mortgages) would have a claim against the property, but only after the first-mortgage (called senior-mortgage) bondholders have been paid in full.
eBook - PDF- (Author)
- 2022(Publication Date)
- Wiley(Publisher)
We will also follow this convention, and where any nuance of meaning is intended, it will be made clear. Moreover, the term “fixed income” is not to be understood literally: Some fixed-income securities have interest payments that change over time. 1.1. Overview of a Fixed-Income Security A bond is a contractual agreement between the issuer and the bondholders. Three important elements that an investor needs to know about when considering a fixed-income security are: • The bond’s features, including the issuer, maturity, par value, coupon rate and frequency, and currency denomination. These features determine the bond’s scheduled cash flows and, therefore, are key determinants of the investor’s expected and actual return. • The legal, regulatory, and tax considerations that apply to the contractual agreement between the issuer and the bondholders. • The contingency provisions that may affect the bond’s scheduled cash flows. These contin- gency provisions are options providing either issuers or bondholders certain rights affecting the bond’s disposal or redemption. This section describes a bond’s basic features and introduces yield measures. The legal, regulatory, and tax considerations and contingency provisions are discussed in subsequent sections. Chapter 1 Fixed-Income Securities: Defining Elements 5 1.1.1. Basic Features of a Bond All bonds, regardless of issuer, are characterized by the same basic features, which include maturity, par or principal amount, coupon size, frequency, and currency. 1.1.1.1. Issuer Many entities issue bonds: private individuals, such as the musician David Bowie; national governments, such as Singapore or Italy; and companies, such as BP, General Electric, or Tata Group. Bond issuers are classified into categories based on the similarities of these issuers and their characteristics.
eBook - PDFIndian Financial Markets
An Insider's Guide to How the Markets Work
- Ajay Shah, Susan Thomas, Michael Gorham(Authors)
- 2008(Publication Date)
- Elsevier Science(Publisher)
C H A P T E R 6 Corporate Bonds The corporate bond market involves all bonds that have credit risk, i.e., bonds issued by all entities other than the Central Government. This includes not just the bonds issued by private Indian firms but, more significantly, bonds issued by sub-national agencies such as state governments (SG) and municipalities, as well as the Public Sector Units or Entities (PSU/PSE) which are firms where the majority shareholder is the central or state government. 1 In India, the corporate and sub-national bonds that are raised in the market are largely privately placed, have very low trading, and suffer from severe lack of transparency in pricing and liquidity. It is much smaller in size than the GOI bond market as seen in Table 6.1. Unlike some areas of Indian finance where progress has been taking place, the share of corporate debt in the overall bond market has actually been dropping. In this chapter, we look at products, participants, market mechanisms, and some policy issues. 6.1 THE PRODUCTS By definition, Corporate Bonds are bonds issued by firms and sub-national bonds are issued by any other state-level entity than the Central Government of India. Both financial firms (e.g., banks) and nonfinancial firms issue bonds. A distinction that is important among firms is that of government ownership. The corporate bond market generally assumes that public sector firms cannot fail, because they are backed by a guarantee from the State. 1 A deeper examination of the bonds issued by state governments inevitably becomes an examination of the fiscal soundness of sub-national governments. On this subject, see Kishore and Prasad (2007). 95 96 India’s Financial Markets TABLE 6.1 Resources Raised from the Debt Markets 2000–2001 2004–2005 Rs.
eBook - PDF- Roy E. Bailey(Author)
- 2005(Publication Date)
- Cambridge University Press(Publisher)
12.1 What defines a bond? The prototypical bond is a contract that commits the issuer to make a definite sequence of payments until a specified terminal date. For example, the issuer might promise to pay $100 per annum from the present until 30 June 2025, at which time the contract will terminate with a lump sum payment of $1000. An important characteristic of many bonds is that they are commonly bought and sold in secondary markets. In this context, bonds are a special form of loan, which is commonly an agreement between two parties (borrower and lender) that is typically not traded with anyone else. Also, bonds are often long-lived; e.g. twenty or more years from the date of issue is not uncommon. While, in principle, bonds can be issued by anyone, in practice they are issued by governments, their agencies (including supranational bodies, such as the World Bank) and incorporated companies. For companies, bonds provide a way of acquiring capital at a known cost, without sacrificing rights of control over the company if the terms of the contract are fulfilled. In the example above, 30 June 2025 is called the maturity date , the lump sum of $1000 is called the face value (or ‘maturity value’, or ‘principal’) and the sequence of $100 payments are known as coupons . Sometimes the bond would be referred to as a ‘10% bond’, because $100 is 10 per cent of $1000. But, note carefully, there is no particular reason to suppose that the rate of return on the Bond markets and fixed-interest securities 283 bond – however measured – equals 10 per cent. Various ways of defining the rate of return are described in the following sections. The remainder of this section outlines some of the important characteristics that serve to differentiate one bond from another. Bonds can be, and often are, quite complex financial instruments, with all sorts of provisions written into the formal contract – known as the bond’s indenture .
- Dimitris N. Chorafas(Author)
- 2005(Publication Date)
- Butterworth-Heinemann(Publisher)
62 The Management of Bond Investments and Trading of Debt 3.5 Yield of fixed income instruments and the ECB model This is only a preliminary discussion on yield (for a detailed discussion on yield and yield curves see Chapter 7 and Chapter 9) intended to bring to the reader’s attention the fact that yield is not necessarily the same with nominal interest. Furthermore, publicly traded debt instruments may have a fixed interest rate or a variable one, the latter being known as floating interest rate. Because the fixed interest rate is by far the more frequently used, bonds are generally known as fixed income instruments. Being active in the fixed income business means to originate, trade, and distribute a variety of debt-based instruments, including structured ones. It also means being responsible for loan syndication and for administering a loan portfolio – which may or may not be securitized. When it is managed at that broad scale, the fixed income business serves a wide client base of investors and borrowers, offering a range of fixed income services which: The underwriting of debt instruments, and their sale to individual investors, insti-tutional investors, and other entities Principal finance, which involves the purchase, origination, and securitization of credit instruments, and A variety of derivative banking products, from structured finance to other lever-aged financial instruments. Interest rate-based credit products, from government bonds and Corporate Bonds to securitized loans, are subject to market acceptance and the market’s mood expressed through implied bond market volatility (see section 3.4). This may be shorter term or longer term. Also short term and longer term may be the pattern of bond yields and rising or falling prices. The yield of a security is a basic metric for valuation as far as its return to the investor is concerned. Fixed income securities are sold at a price which, to a significant extent, is established by the market.
eBook - PDF- R. Stafford Johnson(Author)
- 2013(Publication Date)
- Bloomberg Press(Publisher)
However, such clauses also increase the company’s interest costs at a time when it may not need higher rates. Commodity-Linked Bonds A commodity-linked bond is one that has its coupons and possibly principal tied to the price of a particular commodity. The bonds are designed to provide a company a hedge against adverse changes in the price of a commodity. For example, an oil-producing com- pany might sell an oil-index bond in which the interest is tied to the price of crude oil. Voting Bonds As the name indicates, voting bonds give voting privileges to the holders. The vote is usually limited to specific corporate decisions under certain conditions. Assumed Bonds An assumed bond is one whose obligations are taken over or assumed by another company or economic entity. In many cases, such bonds are the result of a merger. That is, when one Corporate Debt Securities 289 firm takes over or buys a second firm, the second firm usually loses its identity (legally and in name). As a result, the first company takes over the liabilities of the second. Accordingly, the bonds of the second are assumed by the first firm’s promise to pay, often with ad- ditional security pledged by the first company in order to allay any fears of the creditors. BLOOMBERG’S SECF AND ADVANCED BOND SEARCH SRCH ; CLICK “ADVANCED SEARCH” Given the many type of Corporate Bonds, Bloomberg’s bond “Advanced Search” screen (accessible on the SRCH screen) can be used to find bonds with certain features. The slides in this exhibit show a bond search for U.S., dollar-denominated, investment-grade Corporate Bonds in the energy sector. SECF: The SECF screen is also a good way to screen for bonds with certain features. The slides show screenings for equipment-trust bonds and subordinate debentures.
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