Types of Bonds and Bond Characteristics

Study Notes

Bonds are a type of fixed income or debt investment.
There are three main types of bonds: corporate bonds, government bonds, and municipal bonds.

Corporate bonds have a coupon rate, face or par value, and maturity.
Companies use investment bankers to gauge interest and structure their bond offerings.
Bond indenture is a written agreement between the corporation and investors, outlining terms of the bond, total amount issued, use of bonds, call positions, and collateral.
Bearer bonds, also known as "zero coupon bonds," have no registered owner and are no longer used due to theft concerns.
Seniority in bankruptcy proceedings is: creditors (bondholders), preferred stockholders, and then common stockholders.

Government bonds are also known as "treasuries."
Types of government bonds include treasury bills (short-term, <1 year), treasury notes (medium-term, 1-10 years), and treasury bonds (long-term, 10-30 years).
Government bonds are debenture bonds, meaning no physical collateral is pledged.

Municipal bonds are issued by states, cities, and countries and offer a tax advantage (triple tax-free).
Municipal bonds are also debenture bonds, with no physical collateral pledged.

All bonds are traded over-the-counter (OTC).
Bond rating agencies, such as Standard & Poor's, Moody's, and Fitch, rate the creditworthiness of bond issuers.
Junk bonds have the lowest rating and are high-risk, high-yield investments.

Commodities are raw materials used to create products for consumers, including metals, foods, energy, and the S&P 500 (a synthetic commodity index).
Commodities are traded at mercantile exchanges in Chicago and New York.
Futures contracts are used for taking physical delivery of commodities.
The spot market, or cash/physical market, settles in cash.

Derivatives are securities whose price is dependent on an underlying asset, such as a stock, and are characterized by leverage (speculation).
Examples of derivatives include options, which can be used for stocks, bonds, currencies, commodities, and market indexes.
Option contracts give the right to buy (calls) or sell (puts) 100 shares of the underlying stock.
Calls are bullish (buy) and puts are bearish (sell).
Options can be used for speculation or as a hedge product to protect another investment.
The advantage of options is leverage, while the disadvantage is time (they expire).
Most options expire worthless.
ESOPS (employee stock option plans) typically have a 5-10 year expiration, must be call options, must be "in the money," and must be sold back to the company.

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