Corporate bonds are debt obligations issued by corporations. They pay an annual coupon (interest) payment that is typically fixed until the maturity of the bond. Some corporate bonds are step-up coupon bonds, which means that it is spelled out in the indenture that the bond coupon rate (and therefore interest payment) will adjust ...
Some corporate bonds are callable meaning that the company can repay the bond early. The company may want to do this if interest rates fall much the same way homeowners refinance a mortgage.
A special type of bond called convertible bonds can be traded in for shares of the issuing company's stock. These allow the issuing company to offer a lower interest rate. The details of the conversion feature are spelled out in the indenture.
Bonds that are not secured by any specific assets are known as debentures. Other bonds are secured by specific assets, which include: 1 Mortgage bonds, which are secured by a mortgage or pool of mortgages. These types of bonds played a significant role in the 2008 financial crisis. 2 Enhanced equipment trust certificates (EETCs), a debt instrument that allows a company to borrow in order take possession of an asset while paying for it over time. The equipment is pledged as collateral for the bond. Northwest Airlines pioneered the use of EETCs for aircraft finance in 1994.
They are rated due to default risk. Bonds pay interest as a percentage of face value known as the coupon rate. This rate is usually fixed but could adjust up for step-coupon bonds, where the bond coupon rate (and therefore interest payment) will adjust at set periods during the bond life.
Because corporations face the possibility of default, they are rated by risk with the lowest risk bonds being rated AAA. Bonds rated BB or lower must offer higher interest to attract investors and are thus called high-yield (or junk) bonds.
Secured Bonds. Bonds that are not secured by any specific assets are known as debentures. Other bonds are secured by specific assets, which include: Mortgage bonds, which are secured by a mortgage or pool of mortgages. These types of bonds played a significant role in the 2008 financial crisis.