1.1.8.1 Bonds

Bonds are fixed income securities. The basic characteristics of the bonds are as follows:

• Bondholders are typically lenders to the corporation and not owners as in the case of equity shares
• They carry no voting rights
• They carry a fixed interest rate, which gets paid to the bondholder on a periodic basis
• There is a maturity period associated with the bonds, upon which the principal is repaid back by the corporation to the bond holders
• The claim of bond holders take precedence over the claim of preference / equity share holders in the event of liquidation

Bonds are typically classified into fixed income securities with long term maturity (7 – 10 years), commercial paper with very short maturity term (< 18 months) and treasury notes which fall in the intermediary range.

Bond Features

• Callable As with preferred stocks, bonds may be callable. Issuers have the ability to retire the issue before maturity, if they want to, under set conditions.
• Convertible Usually this convertible feature allows the bond to be converted into equity, thereby reducing the corporate debt.
• Adjustable-rate bonds- The coupon rate on this type of bond is changed periodically. By changing the coupon rate to reflect current economic conditions, the bond’s price behaves more like that of a short-term instrument.
• Zero-coupon bonds- These are discounted instruments offered below the face amount, paying par or face value amount at maturity. The difference is the interest earned.
• Registered / Bearer bonds - Registered bonds are fully registered. This means the name of the owner or that of the nominee is maintained by a registrar. Interest on these bonds would be paid to the owner as appearing in the books of the registrar as of the interest payment date. Bearer bonds are transferable by endorsement. The interest coupons are issued along with the bonds, and the person who submits the interest coupon to the bank as of the interest payment date earns the interest on those bonds. Registrar does not maintain the books of the owners of the bonds for these bonds.
• Series bonds - Corporations may issue bonds in series (say I, II, III, etc). Most of the characteristics would be the same across all the series except that the maturity date for the series can be different, and it might follow an order.

Bonds may be retired / redeemed by three methods:

• In redemption, the bonds are retired, and the bondholders are paid cash. Here again, the bonds are retired completely in one stroke or a logical sequence of the series.
• In a conversion, the bondholders exchange their bonds for shares of common stock.
• In a refunding, the corporation retires one bond issue by issuing another.