Corporate Bonds

Lesson

Corporate bonds are debt securities issued by corporations to raise capital.

Practice Question #1

Which of the following is NOT a type of corporate bond?

A) Callable bond

B) Convertible bond

C) Municipal bond

D) Debenture

Select an option above to see an explanation here.

A) Callable bonds are a type of corporate bond that the issuer can redeem before maturity. B) Convertible bonds are a type of corporate bond that can be converted into shares of the issuer's common stock. C) Municipal bonds are debt securities issued by state or local governments, not corporations. D) Debentures are unsecured corporate bonds backed only by the issuer's creditworthiness.

Terms

Corporate bond:: A debt security a corporation issues to raise capital.
Debenture:: An unsecured corporate bond backed only by the issuer's creditworthiness.
Secured bond:: A corporate bond backed by specific issuer assets.
Convertible bond:: A corporate bond that can be converted into a predetermined number of shares of the issuer's common stock.
Callable bond:: The issuer can redeem a corporate bond before its maturity date.
Puttable bond:: A corporate bond that allows the bondholder to sell the bond back to the issuer at a specified price before maturity.
Credit rating:: An assessment of the creditworthiness of a bond issuer provided by credit rating agencies.
Default risk:: The risk that a bond issuer will fail to make interest or principal payments when due.

Practice Question #2

What is the primary difference between a secured bond and a debenture?

A) The interest rate

B) The maturity date

C) The credit rating

D) The collateral backing the bond

Select an option above to see an explanation here.

A) The interest rate is not the primary difference between secured bonds and debentures. B) The maturity date is not the primary difference between secured bonds and debentures. C) The credit rating may be affected by the type of bond, but it is not the primary difference between secured bonds and debentures. D) The primary difference between a secured bond and a debenture is that specific issuer assets back a secured bond. In contrast, a debenture is unsecured and backed only by the issuer's creditworthiness.

Historical Example

In the early 2000s, a major telecommunications company issued billions of dollars in corporate bonds to finance its aggressive expansion plans. However, the company's financial performance deteriorated, and it eventually filed for bankruptcy. As a result, the value of its corporate bonds plummeted, causing significant losses for investors.

Practice Question #3

Which of the following risks is most closely associated with investing in corporate bonds?

A) Inflation risk

B) Default risk

C) Market risk

D) Liquidity risk

Select an option above to see an explanation here.

A) Inflation risk is a concern for all fixed-income investments, but it is not the most closely associated risk with corporate bonds. B) Default risk is the risk that a bond issuer will fail to make interest or principal payments when due, which is most closely associated with investing in corporate bonds. C) Market risk is a concern for all investments but is not the most closely associated risk with corporate bonds. D) Liquidity risk is a concern for some corporate bonds, but it is not the most closely associated risk with corporate bonds.

Real-World Example

A well-known technology company issues a 10-year corporate bond with a 3% annual interest rate to raise funds for a new research and development project. Investors who purchase the bond will receive interest payments from the company.