Baby Bond

Finance a la shmoop what are the major classes of bonds? well there's world

history advanced trig intro to growing a moustache but of course that's just for [Books appear on table]

college bound bonds who are trying to impress the top tier universities well

in terms of bond classes in the real world there are so many flavors to

choose from first we've got senior obligation bonds [Man walking in street and senior obligation bond appears]

and these guys aren't cranky or gray-haired they are the first type of

bonds that a company would have to pay if they went bankrupt they're often

considered the most secure types of bonds for just that reason so they pay [Senior obligation bond stamped with most secure]

less interest then there are junior obligation bonds which are slightly less

secure than senior bonds so they've paid a little bit more rent on the money if a

company declares bankruptcy the juniors are paid after the seniors duh...

sophomores, freshmen get behind them asset-backed bonds are a different thing

and they're backed by the assets a company has for example an airline might [Plane landing on runway]

guarantee its bonds via the airplanes it owns if it owns them all right moving on

then we have debentures which are backed only by the creditworthiness of the

company so basically the company is just handing you an IOU and promising to pay [People shaking hands]

you back with a handshake trust us yeah sure so debentures have to pay

even more interest and if the company messes up and can't pay you back well

too bad cupcake the only comfort you would have in that situation is that the

company's credit would be wrecked forever if they couldn't pay their [Miley Cyrus swinging on wrecking ball]

debentures or other forms of bonds at the end of the CEOs career and pretty

much all the management and so on so they would really hate to go bankrupt yet

with the debenture yeah and that that all might be cold comfort to you though

especially if your investments were the ones wiped out by them not paying their [Woman appears at office desk]

debentures and well then you can't pay your utility bill all right moving on

convertible bonds like their name suggests can be converted usually into

common stock at a given price to the given time period you can make a tidy

profit converting bonds into stocks if a company suddenly starts to do well and

stock prices really increase like we had $1,000 per bond convertible into 20 [1,000 dollar par bond appears]

shares of stock well when the stocks only at 10 bucks that's not

very attractive but if that stock went to $50 it'd be like break-even if I went

to $100 while the bond converts and you'd double your money there...

all right well finally there are zero

coupon bonds which don't pay you anything until the very end you buy them

at a big discount like six hundred twelve dollars and then they pay par

a thousand dollars like ten years later once they reach maturity they pay back

what you invested plus all the interest that is built up in one chunk... think

high school dating the problem is that some companies have a hard time paying [Man stood beside vault of cash]

back all these payments at once and you get no interest payment along the way

with a zero coupon bond so they tend to pay even more interest which is good for

the person lending the money assuming that they actually get paid back their [Interest money transfers from borrower to lender]

interest in principal at the end of the zero coupon right well some company set

up special funds like bond sinking fund equivalents so that well they have [Cash falling]

enough money at the end to pay back their bonds once those bonds reach maturity

unlike the writers here at Shmoop you know the maturity thing will never

happen [Shmoop worker using PC]