The Handbook of Financial Instruments

Chapter 11 Corporate Bonds

Frank J. Fabozzi, Ph.D., CFA

Adjunct Professor of Finance School of Management Yale University

Corporations issue various types of financial instruments to raise funds. In general, corporate financial instruments can be classified as either a debt obligation or equity. In turn, equity can be classified as either common stock or preferred stock. In Chapter 4, common stock is covered. In Chapter 12, preferred stock is explained. Basically, the common stockholders are the residual owners of the firm. Preferred stockholders have priority over common stockholders in the case of distribution of dividends and proceeds in the case of liquidation of the firm.

The debt obligations of a corporation include bonds, medium-term notes, asset-backed securities, commercial paper, and bank loans. The key feature of corporate debt obligations is that they have a priority over the claims of equity holders in the case of bankruptcy. In this chapter we will focus on corporate bonds and medium-term notes. Other than the way in which they are issued, there is no difference between corporate bonds and medium-terms notes. Asset-backed securities, commercial paper, and banks loans are covered in Chapters 17, 6, and 19, respectively.

CORPORATE BANKRUPTCY AND CREDITOR RIGHTS

The holder of a corporate debt instrument has priority over the equity owners in a bankruptcy proceeding. Moreover, there are creditors who have priority over other creditors. The law governing bankruptcy ...