A Guide to Investing In Corporate Bonds Access the corporate debt income portfolio
TABLE OF CONTENTS What are Corporate Bonds?... 4 Corporate Bond Issuers... 4 Investment Benefits... 5 Credit Quality and Bond Ratings... 6 Investment Grade vs. High Yield Corporate Bonds... 6 Understanding Collateralization... 7 The Capital Structure... 8 Redemption Provisions... 9 Corporate Bond Structures... 10 Fixed Rate Bonds... 10 Callable Step-Up Bonds... 10 Floating Rate Securities... 11 Zero Coupon Bonds... 12 Preferred Securities... 12 Convertible Bonds... 13 TLGP Debt... 13 Corporate Bond Investment Considerations... 13 How Corporate Bonds Are Taxed... 14 To Learn More About Corporate Bonds... 15 2
Corporate Bonds Corporate bonds are debt securities issued by both public and private corporations. They are a common way for a company to raise money for various purposes, such as purchasing equipment, building new facilities, or growing their business. The corporate bond market is large and liquid: 1 3
What Are Corporate Bonds? Corporate Bond Issuers 4
Investment Features Of Corporate Bonds ATTRACTIVE YIELDS PREDICTABLE INCOME WIDE RANGE OF MATURITIES CREDIT QUALITY LIQUIDITY DIVERSIFICATION 5
A LOW MINIMUM INVESTMENT PAYMENT CLAIM SENIORITY INVESTMENT GRADE VS. HIGH YIELD BONDS INVESTMENT GRADE CORPORATE BONDS HIGH YIELD CORPORATE BONDS 6
Rating Moody s S&P Fitch Investment Grade Best Quality Aaa AAA AAA High Quality Aa1, Aa2, Aa3 AA+, AA, AA- AA Upper Medium Grade A1, A2, A3 A+, A, A- A Medium Grade Baa1, Baa2, Baa3 BBB+, BBB, BBB- BBB Below Investment Grade Speculative Grade Ba1, Ba2, Ba3, B1, B2, B3 BB+, BB, BB-, B+, B, B- BB, B Highly Speculative Grade Caa1, Caa2, Caa3, Ca CCC+, CCC, CCC-, CC, C CCC, CC, C Default C D D FALLEN ANGELS Understanding Collateralization Secured bonds 7
Mortgage Bonds Equipment Trust Certificates Collateral Trust Bonds The Capital Structure SALE, LIQUIDATION PROCEEDS OR REVENUE FROM OPERATIONS AVAILABLE FOR DISTRIBUTION 1st Secured Debt From available assets after administrative and legal expenses are paid in full General Unsecured Debt 2nd Senior Unsecured Debt From available assets after secured debt is paid 3rd Subordinate Debt From assets remaining after secured debt and senior unsecured have been paid in full 4th last Preferred Stock Common Stock From assets remaining after payment of all debts and liabilities including costs of distribution and liquidation From assets remaining after payment of all debts and liabilities including costs of distribution and liquidation, after preferred stock and all debt securities 8
Redemption Provisions CALL PROVISIONS Make Whole Calls (MWC) REFUNDING SINKING FUND 9
Corporate Bond Structures FIXED RATE BONDS Fixed Coupon Callable Corporate Bonds Called at par Not called What Causes The Issuer to Call a Bond? CALLABLE STEP-UP BONDS Called at par Not called 10
FLOATING RATE SECURITIES 11
ZERO COUPON BONDS PREFERRED SECURITIES Traditional Preferred Stock Trust and Enhanced Trust Preferreds 12
CONVERTIBLE BONDS TLGP DEBT Corporate Bond Investment Considerations INTEREST RATE RISK 13
CREDIT RISK REINVESTMENT RISK SECONDARY MARKET RISK CALL RISK EVENT RISK How Corporate Bonds Are Taxed INTEREST INCOME CAPITAL GAINS & LOSSES 14
To Learn More About Corporate Bonds 15