Corporate bonds

Senior secured bonds
· backed by all of the issuer’s assets and highest priority in bankruptcy eg mortgage bonds

Collateral trust bonds
· backed by financial assets eg stocks or bonds
· Equipment trust certificate - backed by specific of transportation equipment).
· Mortgage bonds - backed by specific assets
· Debentures -backed only by issuer’s promise to pay
· Subordinate bonds -lowest ranking bonds, claim after senior bonds and debentures, aka as junior bonds

Secured debt backed by assets or collaterals classified as personal property, financial assets, real property.

Unsecured debt is debenture bonds. Subordinated debentures ranked below debenture bonds

If a firm goes bankrupt, bondholders have priority over stockholders. Secured debt holders have the highest chance of recovering their investment. Corporates are rated by rating agencies for risk of default.

Default rates (issuer default rate - equal rate of all issues)
· Dollar default rate ( par value of issue defaulted in a year divided by total par value outstanding
· Cumulative dollar default rate measures the default probability over the bond lifetime.

Credit enhancements:
Third party guarantees and letter of credit (LOC) issued by banks.

Four C’s of credit analysis
Character
Capacity
Collateral
Covenants

Corporate bonds bells and whistles:
· Sinking fund bonds
· issuer sets aside funds to redeem some bonds before scheduled maturity

Callable bonds
· issuer can redeem before scheduled maturity.

Putable bonds
· bondholders can sell bonds back to issuer before scheduled maturity

Convertible bonds
· bondholders can exchange into issuer’s stock

Debenture bonds with warrants attached

Zero coupon bonds
· pay no coupons, issued at steep discount to par
· Income bonds - interest paid only if issuer makes a profit, else accumulated and paid later