The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

CORPORATE BONDS

As the name indicates, corporate bonds are issued by corporations. Corporate bonds are classified by the type of issuer. The four general classifications used by bond information services are: (1) utilities, (2) transportations, (3) industrials, and (4) banks and finance companies.

The promises of a corporate bond issuer and the rights of investors are set forth in great detail in the bond indenture. Failure to pay either the principal or interest when due constitutes legal default and court proceedings can be instituted to enforce the contract. Bondholders, as creditors, have a prior legal claim over preferred and common stockholders as to both income and assets of the corporation for the principal and interest due them.

Security for Bonds

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.

Either real property or personal property may be pledged to offer security beyond that of the general credit standing of the issuer. With a mortgage bond, the issuer has granted the bondholders a lien against the pledged assets. A lien is a legal right to sell mortgaged property to satisfy unpaid obligations to bondholders. In practice, foreclosure and sale of mortgaged property is unusual. If a default occurs, there is usually a financial reorganization of the issuer in which provision is made for settlement of the debt to bondholders. The mortgage ...