Corporate Bonds: Issuance, Trading, and Security Features

 
CISI – Financial Products, Markets & Services
 
Topic – Bonds
(5.3) Corporate bonds
 
What are corporate bonds?
As we saw before, corporate bonds are 
issued by listed
corporate entities
 to fund expansion and finance
investment.
 
A 
corporate bond 
is usually restricted to 
longer-term debt
instruments
, with a redemption date that is 
more than one
year 
away at the point of issue.
 
A 
commercial paper 
refers to instruments with a 
shorter
maturity
.
It only tends to be 
well established 
and relatively
stable companies 
that can issue bonds with a 
maturity
greater than ten years 
at an acceptable cost
 
How are they traded?
 
Most corporate bonds are
 listed on stock Exchanges.
 
 
 
However ,the majority of trading 
does not take place
on the stock exchange systems.
 
 
 
Instead, most bonds dealing is done in the 
‘over-the-
counter’ (OTC) market
, between professionals – that
is, 
directly between market counterparties.
Features of corporate bonds - Security
 
Bond Security
 
Security refers to the 
guarantee provided to the investor that the bond will
be repaid
.
What happens when an individual doesn’t pay their mortgage?
 
The lender makes sure that it has the ability to repossess the property if
the scheduled mortgage payments are not made!
 
The same principle applies with corporate bonds.  This is known as
security.
 
Security usually means 
a legal charge 
over some or all of the 
bond issuer’s
assets 
e.g. Properties (offices and factories), unsold goods or uncollected
debts
 
If the issuer fails to pay the required coupons or the principal on the bonds,
the 
bondholders can claim those assets 
in order to recoup the money that
is owed to them.
 
Bondholders regard their borrowings 
as safer 
than if there were no
security.
 
Logically, the 
greater the value of the security
 offered relative to the
amount borrowed, 
the lower the cost of borrowing 
should be.
Features of corporate bonds - Security
Different types of 
security
 may be offered:
 
A 
specific asset
, such as
the head office of the
company, or a particular
factory, provides the
security for the loan.
 
General assets 
of the
company are offered as
security for the loan,
which might include the
company’s cash at the
bank, trade debtors and
unsold stock.
 
A 
guarantee
 from
another organisation
or individual that if the
issuer defaults, they
will repay the
bondholders e.g. A
bank
Types of corporate bonds – Fixed Rate Bonds
Fixed Rate
Bonds
 
Paid yearly or half-yearly
 
The date of maturity and repayment
of the nominal value will remain fixed
throughout the life of the bond
Types of corporate bonds – Floating Rate Notes (FRNs)
Floating Rate
Notes (FRNs)
 
Coupon rate will be 
linked to a
published rate of interest
 
London InterBank Offered
Rates (LIBOR)
 are published
daily by a trade body
called the British Bankers’
Association.
 
FRNs usually pay 
interest at
LIBOR plus a quoted margin 
or
spread.
Categorising bonds
Bonds can also be categorised geographically:
 
Domestic Company
e.g. UK company
 
Domestic Market
e.g. UK investors
 
Domestic currency
e.g. In £ sterling
 
Overseas Company
e.g. US company
 
Domestic Market
e.g. UK investors
 
Domestic currency
e.g. In £ sterling
Categorising bonds - Eurobonds
 
Eurobonds are basically 
large international 
bond issues that are often
made by governments and multinational companies.
 
Characteristics
 
Key Features:
Denominated in a 
currency different
from that of the financial centre 
or
centres in which they are issued.
 
Eurobond issues are 
often issued in a
number of financial centres
simultaneously.
 
Security
 
Do not
 provide any underlying fixed or floating security to the bondholders
 Instead they are assessed by one of the 
credit ratings agencies
 Issuing company typically includes a 
‘negative pledge’ clause 
in the bond
o
 Prevents the company from subsequently making any secured bond issues
o
 Stops any seniority over a company’s assets in the event of liquidation
 
Most eurobonds are issued as 
conventional bonds 
(or ‘straights’), with a 
fixed nominal
value, 
fixed coupon 
and 
known redemption date.
Most Eurobond activity 
takes place out of London
Categorising bonds – Advantages of Eurobonds
Eurobonds offer advantages over using domestic bonds:
Advantages of 
Advantages of 
issuing Eurobonds
issuing Eurobonds
Choice of innovative
products to more precisely
meet issuers’ needs
Ability to reach potential
lenders internationally rather
than just domestically
Anonymity to investors as issues
are made in bearer form (there
is no register of bondholders
maintained by the issuer)
Gross interest
payments made
to investors
Lower funding costs
due to the
competitive nature
and greater liquidity
of the market
Ability to make
bond issues at
short notice
Less regulation
and disclosure
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Corporate bonds are long-term debt instruments issued by listed companies to fund expansion and investment. They are traded primarily in the over-the-counter market, offering security to investors through various asset types. Different types include fixed rate bonds with fixed maturity dates.

  • Corporate bonds
  • Issuance
  • Trading
  • Security features
  • Fixed rate bonds

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  1. CISI Financial Products, Markets & Services Topic Bonds (5.3) Corporate bonds cisi.org

  2. What are corporate bonds? As we saw before, corporate bonds are issued by listed corporate entities to fund expansion and finance investment. A corporate bond is usually restricted to longer-term debt instruments, with a redemption date that is more than one year away at the point of issue. A commercial paper refers to instruments with a shorter maturity. It only tends to be well established and relatively stable companies that can issue bonds with a maturity greater than ten years at an acceptable cost cisi.org

  3. How are they traded? Most corporate bonds are listed on stock Exchanges. However ,the majority of trading does not take place on the stock exchange systems. Instead, most bonds dealing is done in the over-the- counter (OTC) market, between professionals that is, directly between market counterparties. cisi.org

  4. Features of corporate bonds - Security What happens when an individual doesn t pay their mortgage? The lender makes sure that it has the ability to repossess the property if the scheduled mortgage payments are not made! The same principle applies with corporate bonds. This is known as security. Bond Security Security refers to the guarantee provided to the investor that the bond will be repaid. Security usually means a legal charge over some or all of the bond issuer s assets e.g. Properties (offices and factories), unsold goods or uncollected debts If the issuer fails to pay the required coupons or the principal on the bonds, the bondholders can claim those assets in order to recoup the money that is owed to them. Bondholders regard their borrowings as safer than if there were no security. Logically, the greater the value of the security offered relative to the amount borrowed, the lower the cost of borrowing should be. cisi.org

  5. Features of corporate bonds - Security Different types of security may be offered: A specific asset, such as the head office of the company, or a particular factory, provides the security for the loan. General assets of the company are offered as security for the loan, which might include the company s cash at the bank, trade debtors and unsold stock. A guarantee from another organisation or individual that if the issuer defaults, they will repay the bondholders e.g. A bank cisi.org

  6. Types of corporate bonds Fixed Rate Bonds Fixed Rate Bonds The date of maturity and repayment of the nominal value will remain fixed throughout the life of the bond Paid yearly or half-yearly cisi.org

  7. Types of corporate bonds Floating Rate Notes (FRNs) Floating Rate Notes (FRNs) Coupon rate will be linked to a published rate of interest London InterBank Offered Rates (LIBOR) are published daily by a trade body called the British Bankers Association. FRNs usually pay interest at LIBOR plus a quoted margin or spread. cisi.org

  8. Categorising bonds Bonds can also be categorised geographically: Category Domestic Bond Issuer Domestic Company e.g. UK company Market Domestic Market e.g. UK investors Currency Domestic currency e.g. In sterling Foreign Bond Domestic Market e.g. UK investors Domestic currency e.g. In sterling Overseas Company e.g. US company cisi.org

  9. Categorising bonds - Eurobonds Eurobonds are basically large international bond issues that are often made by governments and multinational companies. Most eurobonds are issued as conventional bonds (or straights ), with a fixed nominal value, fixed coupon and known redemption date. Most Eurobond activity takes place out of London Characteristics Key Features: Category Eurobond Issued out of London Currency $US Denominated in a currency different from that of the financial centre or centres in which they are issued. Eurobond Hong Kong Eurobond issues are often issued in a number of financial centres simultaneously. Security Do not provide any underlying fixed or floating security to the bondholders Instead they are assessed by one of the credit ratings agencies Issuing company typically includes a negative pledge clause in the bond o Prevents the company from subsequently making any secured bond issues oStops any seniority over a company s assets in the event of liquidation cisi.org

  10. Categorising bonds Advantages of Eurobonds Eurobonds offer advantages over using domestic bonds: Choice of innovative products to more precisely meet issuers needs Ability to reach potential lenders internationally rather than just domestically Lower funding costs due to the competitive nature and greater liquidity of the market Ability to make bond issues at short notice Advantages of issuing Eurobonds Less regulation and disclosure Gross interest payments made to investors Anonymity to investors as issues are made in bearer form (there is no register of bondholders maintained by the issuer) cisi.org

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