Many corporations issue (or float) bonds to borrow money for operations. Bonds are typically issued at $1,000 par. Par is another word for “face amount.”
Long-term bonds mature in 10 to 40 years. They generally pay interest semi-annually (twice a year). Many bonds may be recalled prior to maturity by the issuer.
If a corporation goes bankrupt, bondholders (and stockholders, too) can claim its assets. Bondholders receive assets after the IRS but before stockholders. Some corporations issue bonds for less than their par values. When they repay the bonds at maturity, the investors receive the face values.
The interest on bonds is stated as a percentage of par value.
Bond prices are quoted on $100 even though their face amount is usually $1,000. For example, a quote of 85 indicates a bond selling for $850. Amounts less than $10 are quoted in eighths. An eighth is equal to $1.25. A quote of 80 1/8 is $801.25 ($800 + $1.25).
Various rating services rate corporate bonds for their safety.
There are three common features of corporate bonds. All of these are established at the time of issue.
Callability is the feature of a bond whereby the corporation that issued it can redeem the bond before it matures.
Corporations may call their bonds when interest rates drop below their current bond rates. They may then replace high-yielding bonds with lower-yielding bonds. Call provisions must be made clear before a bond is issued. These provisions include the call price, which is the price at which the bond will be sold back to bond issuers.
The call price is usually above par. The company must also include dates on which it can legally begin to order its bonds redeemed.
A put provision is the privilege whereby the bondholder may redeem a bond at its face value before it matures.
Investors may want to do this when interest rates are rising and they can take advantage of higher rates elsewhere. They may not “put” their bonds whenever they choose, however. The issuer assigns dates for this provision, after which the bondholders may then redeem the bonds.
Convertibility is the option of converting a bond into stock. Bonds with this feature are called convertible bonds. They give the investor the option to convert the bond into the issuing company’s common stock. Conversion must occur at specified times, at specified prices and under specified conditions, all set down in writing at the time of issue. Bonds can be callable and convertible in one. With this provision, the company may have the option to pay investors in stock.
By investing funds in a variety of maturities and programs, a laddered bond portfolio can help reduce a portfolio’s exposure to changes in interest rates.
Bond laddering can be an effective strategy in both rising and declining interest rate environments. If interest rates are generally rising, the bonds maturing at the beginning of the ladder generally can be reinvested at the higher prevailing rates as they mature. If interest rates fall, the bonds maturing at the end of the ladder should have above-market returns.
InterNotes are designed to make investing in corporate bonds and other investment grade securities a simpler process. They are offered by companies seeking to broaden their investment base to include individual investors as well as institutions.
Baby Bonds (also known as exchange-traded debt or ETD) have a par value of $25.