Chapter 2.3® - Types of Bonds - Secured & Unsecured, Term & Serial bonds, Registered & Bearer bonds, Convertible & Callable bonds
In this section, we will discuss the many different types of Bonds available as well as their contract specifications and details. Types of bonds range from secured and unsecured bonds, term & serial bonds, registered & bearer bonds as well as convertible & callable bonds.
i) Secured and Unsecured Bonds
Secured bonds, as the name suggests,
have certain assets of the issuing company pledged as collateral or a
guarantee. This protects bondholders and their investments, such that
if the issuing company fails to pay the interest payment & principal
amount upon maturity, bondholders can demand the sale of secured or collateralized
assets in order to pay the bond obligations. On the other hand, Unsecured
bonds (also known as Debentures) do not have any collateral assets pledged
by the issuing company. Instead, bondholders determine the credit rating
of the company before investing their funds in to the bond. The financial
statements of the issuing firm must be strong, with a good cash balance
& good operating and Cash flow in order to entice investors to lend
their money in unsecured bonds.
ii) Term & Serial Bonds
Term bonds are a series of bond issues that all become due on a single specified date. Term bonds can be short term or long term, and can also be called back or converted to other investments before the maturity date. Serial bonds on the other hand consist of a bond issue whose component parts become mature at different dates or series of dates. For instance, a $2 million bond might mature at a rate of $200,000 per year after Year 6 until Year 15 when the entire $2 million balance is paid back.
iii) Registered & Bearer Bonds
Registered bonds are bonds that are issued in the names & addresses of their holders. The issuing company issues interest payments in the form of checks payable to their registered owners and delivered to their homes. Bonds payable to whoever holds them (the bearer) are called Bearer bonds (Unregistered bonds). Since there is no recordkeeping in Bearer bonds, whoever holds the title to the bond upon payment date will be presumed its rightful owner. Thus as a result, lost or stolen bearer bonds are difficult to trace and replace.
iv) Convertible & Callable Bonds
Convertible bonds are when bondholders can exchange their bonds for a fixed number of the issuing company’s common shares. Convertible bonds allow bondholders the potential to increase their net worth by future increases in the market value of the common shares of the issuing company. If the share prices of the company do not increase and the bonds are not converted, bondholders will continue to receive periodic interest payments and their principal amounts upon maturity. Callable or Redeemable bonds contain options under which they can be retired at a stated dollar amount before maturity. Callable bonds are when the issuing company has the option of retiring them; Redeemable bonds are when the purchaser has the right to retire the bond.
Summary of Types of Bonds