>> There are two broad categories of bonds; secured bonds,
which are secured by a specific asset as collateral,
and unsecured bonds, which are not secured by assets as collateral.
Bondholders and bond rating companies
determine credit worthiness based on the reputation of the firm.
Unsecured bonds are the most common type of bond,
and they are often called debentures.
So debentures are unsecured long-term debt.
The benefit to the issuing company is that assets are not tied up as collateral.
Thus they can buy, sell, replace, scrap,
and trade assets without needing to update bond contract details.
For bondholders, debentures might be more risky,
so they must provide a higher rate of return than secured bonds.
There is a hierarchy in the case of bankruptcy.
Debt-holders, including bondholders, get paid
back before preferred and common stockholders.
For debt-holders, secured debt holders are paid before debenture bond holders.
Subordinate debentures are paid last in the debt category.
Another type of bond is a Euro bond.
These are bonds issued in a country
different from the one in which currency the bond is denominated.
For example, a bond issued by an American corporation in
Japan that pays interest in principle in dollars is a Euro bond.
Convertible bonds are bonds that can be converted into stock at a pre-specified price.
Unlike the call provision of bonds in which companies decide when bonds get called,
the bondholders are the ones who decide
whether or not to convert and become stockholders.
You can see why this is a valuable type of bond.
If a company's stock price sores,
convertible bond holders can convert to
stockholders and see huge increases in their investment value.
I stated earlier that most bonds pay interest semiannually.
One exception to that is a zero coupon or zero interests bond.
These bonds have very low or no stated interest rate,
but that does not mean that they are interest free.
Instead of paying interest,
they issue the bonds at a deep discount,
but still have to repay the face value when the bond matures.
It basically means that the bond contains one balloon payment.
Here's a simple example,
a $1,000 face value bond sells for $800.
When it matures, the bondholder who paid $800 initially gets $1,000 back.
So the bond didn't technically pay interest,
but the bond holder received the equivalent of $200 of interests at maturity.
Finally, let's conclude with a brief discussion on bond ratings.
There are bond rating agencies who assess a company's bonds for future risk potential.
Lower bond ratings indicate higher probability of default.
This means that companies must pay
higher returns to compensate investors for that additional risk.
Here's a table showing the bond rating categories from Standard & Poor's.
You can see the highest rate of bonds are AAA bonds.
These bonds have the lowest risk and thus pay the lowest returns.
Junk bonds are not actually a type of bond,
they are irregular corporate bond who has a bond rating of BB or less.
They are sometimes called high yield bonds because they have to pay
a much higher interest rate than say a AAA rated bond.