Investments, tenth edition

2.2 

  Corporate Bonds 

 Corporate bonds are the means by which private firms borrow money directly from the 

public. These bonds are similar in structure to Treasury issues—they typically pay semi-

annual coupons over their lives and return the face value to the bondholder at maturity. 

They differ most importantly from Treasury bonds in degree of risk. Default risk is a real 

consideration in the purchase of corporate bonds, and Chapter 14 discusses this issue in 

considerable detail. For now, we distinguish only among  secured bonds,  which have spe-

cific collateral backing them in the event of firm bankruptcy; unsecured bonds, called 

 debentures,  which have no collateral; and  subordinated debentures,  which have a lower 

priority claim to the firm’s assets in the event of bankruptcy. 

 Corporate bonds sometimes come with options attached.  Callable bonds  give the firm 

the option to repurchase the bond from the holder at a stipulated call price.  Convertible 

bonds  give the bondholder the option to convert each bond into a stipulated number of 

shares of stock. These options are treated in more detail in Chapter 14.