Bonds are loans made to companies to help raise capital for operations and growth. Investors receive a bond certificate outlining the terms of the investment.
Investors can choose between several different types of bonds, varying in terms, levels of risk, features and drawbacks. Investors should have a working knowledge of each of the different types of investment products they purchase, even when using the services of a professional money manager. Learn the key differences between the different types of bonds below.
Term Bonds vs. Serial Bonds
Term bonds refers to a group of bonds issued together, all with the same maturity date. For example, $500,000 in bonds with a ten year term must all be fully paid ten years from the date they were issued. Serial bonds mature on a series of dates. The same $500,000 in bonds, in this case, could mature $100,000 at a time after year five, with the final $100,000 maturing in year ten.
Convertible vs. Callable Bonds
Convertible bonds may be exchanged for a fixed amount of company shares. The investor could take advantage of future increases in stock value by converting bonds to shares.
Callable bonds, also known as redeemable bonds, can be retired prior to maturity for a dollar amount set at the time of purchase. Although redeemable and callable bonds are similar, there is one key difference. Callable bonds may be retired by the issuing company, while the bondholder makes the decision to retire a redeemable bond.
Unsecured vs. Secured Bonds
Secured bonds offer investor protection by ensuring that company property or assets are held as collateral in case of default. If the issuing company fails to pay interest or par value, the company must sell secured assets to fund payments to the bondholders. Unsecured bonds are also known as debentures. In this case, the bonds are issued based on the company's performance and credit rating. Other bonds, such as Canada Savings Bonds, are secured by the government.
Registered Vs. Bearer Bonds
Registered bonds are issued to an owner and list a specific name and address. The owner of the bond is presumed to be the person listed as the registered owner.
Bearer bonds are not registered to a specific group or individual and are largely untraceable. The person holding the bond certificate is the rightful owner, making it difficult to recover lost or stolen bearer bonds. For this reason, bearer bonds are not as popular as they once were.
Confidently Invest in Bonds with Knowledge of Terms and Procedures
Brush up on financial knowledge before moving ahead to buy investments. The Securities Industry and Financial Markets Association (SIFMA) Investing in Bonds website is an excellent resource and learning tool for investors of all types and levels.
Learn to recognize whether the bond in question is secured or unsecured, callable or convertible, or a term or serial bond. Even basic financial knowledge aids investors in making smart decisions, with or without the services of a professional money manager.