Chapter 10: Review five major bond characteristics What is the difference between a treasury bond, treasury note, and corporate bond? What is the difference and similarities between bonds and preferred stock? What is a convertible bond? What are the main component determining bond values? What is meant by yield to maturity? What is the difference between zero coupon bonds, treasury strips, and junk bonds? How is the investment quality of a bond determined?

Major Bond Characteristics

A bond can be described simply as a loan taken by companies from investors. The main characteristics of a bond include;

Maturity

This is the date when the bond’s principal amount will be paid to the company’s investors. Payment will end the bond obligation of the company.

Secured/Unsecured

A bond can be secured or be insecure in nature. The unsecured bonds can also be referred to as debentures whose payments of interest and the return of the principal amount is guaranteed by the issuing company’s credits. Hence, the failure of the company may mean that the investors will not get all their investments back. A secured bond is that in which in case the company is not able to pay their obligation some specified assets can be pledged to the bondholders (Gitman, Joehnk, & Billingsley, 2013).

Liquidation Preference

The liquidation preference is the priorities given by a company to their investors in cases of bankruptcy. The order of preferences in paying after selling off all assets begins with payments to the investors according to debt levels. Senior debt is paid first, then junior debt leaving the stockholders with the leftover (Gitman, Joehnk, & Billingsley, 2013).

Coupon

Coupon is the interest which is paid to the bondholders semiannually or annually.

Tax Status

Tax status of a bond is whether it is a taxable investment or they are tax-exempt. Hence, the capital or the income associated with the bond is not subjected to the federal or state taxation.

Gitman, L. J., Joehnk, M. D., & Billingsley, R. (2013). Personal Financial Planning. Boston: Cengage Learning.