Bonds

Bonds or loan stocks are long term fixed interest income debt securities issued by companies. They usually have a lifespan of five years and are redeemable at par value on maturity.

Bond and loan stock issues vary in many ways and have many optional features. Some are secured by collateral, others are backed by guarantees; yet others have no collateral support and are only unsecured promises to pay. In addition, the bond indenture may provide that the bond may be redeemable at a specified price.

In this way, the issuing company keeps the opportunity to retire the interest expense if its financial picture makes it possible to call in the securities.

There are several types of bonds which may be issued by companies:

• Mortgage Bond (MB)

  This bond is secured by way of legal charge against assets owned by the issuer.

• Redeemable Unsecured Bond (RUB)

  This constitute unsecured obligations of the issuing company. The interest and principal payment are not guaranteed.

• Redeemable Unsecured Guaranteed Bond (RUGB)

  The interest and principal payments on this bond is guaranteed by a third party entity which is usually a bank.

• Redeemable Secured Loan Stocks (RSLS)

  This loan stock is backed by a pledge of assets owned by the issuer.

• Redeemable Unsecured Loan Stocks (RULS)

  This is the same as Reeemable Unsecured Bonds.

• Redeemable Guaranteed Loan Stocks (RGLS)

  The interest and principal payments are guaranteed by an entity other than the issuer, usually a bank.

Different bond issue pay different interest rates. These variations results from the credit standing of the issuing corporation, the collateral that supports the bond, and the situation in the financial markets when a particular bond issue is sold.

Secured and guaranteed bond and loan stock usually bear lower interest rates as they carry lower risk of default than unsecured bond and loan stock.

Interest on bond is usually paid every six months. The interest rate is paid on the face value of the bond. If the interest rate, or coupon rate, on a bond is six percent, $100 million bond will pay $6 million in interest each year, or $3 million each six months.

Purchasers of corporate bond is also exposed to interest risks. As the price of bond moves in the opposite direction of the interest rate, a high interest rate can result in a short-term loss in the market value of the bond. A falling interest rate regime should result in increasing market value.

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