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Bonds
Long Term finance raised in the market place is often called Bonds.Like Commercial Paper, Bonds are basically IOUs for longer periods of time. Bonds may have maturity periods of 5, 10, 15, even 30 years.
Because of the relatively longer maturity of bonds, and hence more risk to the investor of non - payment, there is a number of legal arrangements supporting the payback of bond interest and principal.
The most common bond is referred to as the Corporate Bond. Typically, a Corporate bond is a general obligation bond, meaning it is only backed by the credit of the organization issuing it. The issuing corporation doesn't put up any specific assets to assume repayment of the loan. The buyer of the bond is relying on the full faith and credit of the corporation to repay interest and principal.
These bonds are backed up by specific assets. Equipment Bonds, for example, are supported by specific equipment which will be sold in the event of a bond default. Mortgage Backed Bonds have not made their appearance in Kenya yet, but are quite common in other countries. These bonds are supported by actual mortgage contracts on real estate assets.
The term floating rate and fixed rate refers to the interest rate paid on bonds. Floating rate bonds periodically adjust interest rates according to a pre-arranged agreement. Fixed rate means the interest rate remains the same throughout the life of the bond.
Convertible bonds initially pay interest to the bond holder but have the option of converting the bond into company stock as repayment of the loan instead of cash. The conversion terms – when and how much each bond can be exchanged for – are stipulated at the time the bond is issued.
Because of the relatively longer maturity of bonds, and hence more risk to the investor of non - payment, there is a number of legal arrangements supporting the payback of bond interest and principal.
Corporate (General Obligation) Bonds
The most common bond is referred to as the Corporate Bond. Typically, a Corporate bond is a general obligation bond, meaning it is only backed by the credit of the organization issuing it. The issuing corporation doesn't put up any specific assets to assume repayment of the loan. The buyer of the bond is relying on the full faith and credit of the corporation to repay interest and principal.
Asset Backed Bonds
These bonds are backed up by specific assets. Equipment Bonds, for example, are supported by specific equipment which will be sold in the event of a bond default. Mortgage Backed Bonds have not made their appearance in Kenya yet, but are quite common in other countries. These bonds are supported by actual mortgage contracts on real estate assets.
Floating Rate versus Fixed Rate Bonds
The term floating rate and fixed rate refers to the interest rate paid on bonds. Floating rate bonds periodically adjust interest rates according to a pre-arranged agreement. Fixed rate means the interest rate remains the same throughout the life of the bond.
Convertible Bonds
Convertible bonds initially pay interest to the bond holder but have the option of converting the bond into company stock as repayment of the loan instead of cash. The conversion terms – when and how much each bond can be exchanged for – are stipulated at the time the bond is issued.