Types of Corporate Bonds



Corporations issue bonds in order to raise money to fund the business's expansion. For corporations, issuing bonds proves much simpler than going public and selling shares of the company. Investors pay a set amount and receive interest payments over time (usual semiannually) until the bond matures, at which point the corporation pays back the principal investment. Corporate bonds tend to offer a higher interest rate than government bonds. Bonds can be short-term or long-term.



Companies that are rated highly by credit rating agencies like Standard & Poor's and Moody's are able to sell what are called investment grade bonds. A high rating means that the agency thinks the corporation is capable of paying its debts from issuing bonds, and the investment grade status ensures to the investors that their principal and interest will be returned to them because the company is less likely to default.

Many corporate bonds are debentures, also known as unsecured bonds. This means that corporations issue them without putting up collateral, often as an alternative to selling more stock. Debentures offer a lower yield then other bonds, but carry a fixed rate of return and investors can often purchase them for lower than their face value. While this sounds risky, the bond holders still have claims over the corporation as creditors, but only receive their post-default payments after the secured investors take their portion.

When corporations offer guaranteed bonds, that means that another corporation agrees to pay the interest or principal if the issuer cannot. Often the issuing company is a subsidiary of the guaranteeing company. Thus, the parent company will pay up if the subsidiary ends up defaulting on payments.

Other corporations issue mortgage bonds that offer investors a lien on the corporation's own property. If a corporation were to default, the investors would be able to sell that property in order to complete payments. However, a corporation would more likely restructure to come up with money to pay their investors as opposed to actually selling the property.