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Understand The Security Types Of Corporate Bonds by unite4real: 7:29pm On Jan 17, 2020
To understand corporate bonds, you must first understand key concepts about how the corporate debt relates to the issuer's business capital structure and how the debt, itself, is constructed. These points are crucial for the investor to understand before investing in any corporate debt products.


Separating Corporate Bonds
Corporate bonds are fungible—have the ability to be invested into by investors—debt products. These bonds are available in a variety of risk-reward levels depending on the underlying company's creditworthiness. Corporations will float bonds to finance expenditures and to fund day to day operations. Bonds are often more assessable to businesses than bank loans and often speed up the time-lag in receiving the needed funds.


There are separate classifications of bonds that dictate specifically how the bond relates to the capital structure of the issuing corporation. This is significant because the bond classification actually dictates the payout order in the event the issuer cannot meet its financial obligations—known as default.


When comparing debt to equity, debt always has seniority in the payout order. When comparing unsecured debt to secured debt, secured debt has seniority. For example, preferred stock-holders receive payout before common-stock shareholders do.

1. Secured Corporate Bonds
This is a ranking structure that is used by issuers to prioritize debt payout. At the top in this structure would be the senior “secured” debt for which the structure is named. This is in contrast to structures where the age of the debt places determines which has seniority. If a bond is classified as a secured bond, the issuer is backing it with collateral. This makes it more secure (usually having a significantly higher recovery rate) in the event the company defaults. Examples of this are companies that issue a secured corporate bond by backing it with assets like industrial equipment, a warehouse or a factory.

2. Senior Secured Bonds
Any security labeled "senior" in such a structure is one that takes primacy over any other company’s sources of capital. The most-senior securities holders will always be first to receive a payout from a company’s holdings in the event of default. Then would come those security-holders whose securities are deemed second-highest in seniority, and so forth until the assets used to pay off such debts run out.

3. Senior Unsecured Bonds
Senior unsecured corporate bonds are in most respects just like senior secured bonds with one significant difference: There is no specific collateral guaranteeing them. Other than that, such senior bondholders enjoy a privileged position in the event of default with respect to the payout order.


4. Junior, Subordinated Bonds
After the senior securities are paid out, the junior, unsecured debt will next be paid out from what assets remain. This is unsecured debt, meaning no collateral exists to guarantee at least a portion. Bonds in this category are often referred to as debentures.


Such unsecured bonds only have the issuer’s good name and credit rating as security. Junior or subordinated bonds are named specifically for their position in the payout order: Their junior, or subordinate, status means they only are paid out after senior bonds, in the event of a default.

5. Guaranteed and Insured Bonds
These bonds are guaranteed in the event of default not by collateral, but by a third party. This means that in the event the issuer cannot continue to make payouts, a third party will take over and continue to make good on the original terms of the bond. Common examples of this category of the bond are municipal bonds backed by a government entity or corporate bonds backed by a group entity.

Such insured bonds possess the second level of security in that you have the credit rating of two separate entities instead of just one to rely upon to secure the bond. However, this second entity can only provide as much security as its own credit rating allows, so it’s not 100% insured. Still, guaranteed or insured bonds are much less risky than non-insured bonds, and thus typically carry with them a lower interest rate. Insured bonds will always have a higher credit rating because there are two companies guaranteeing the bond. However, this security premium comes at the cost of a reduced final yield on the bond.

6. Convertible Bonds
Some corporate bond issuers hope to attract investors by offering convertible bonds. These are simply bonds that the bondholder may choose to convert into common stock shares. These shares are typically from the same issuer and issued at a preset price even if the stock’s market price has grown since the bond was first issued.

The price of convertible bonds is a bit more fluid as they are rated upon the company’s stock price and prospects at the time they are issued. Additionally, because these convertible bonds give investors expanded options, they typically have a lower yield than standard bonds of the same size.

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https://www.investopedia.com/articles/investing/121815/understand-security-types-corporate-bonds.asp
Re: Understand The Security Types Of Corporate Bonds by sudhirlucky: 5:34pm On May 26, 2020
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