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Try to make it five paragraphsTypes and Common Features of BondsA bond is a type of debt or long-term promissory note, issued by a borrower, promising to its holder a predetermined amount of interest per period and repayment of principal at maturity. The issuers or borrowers of bonds could be federal and state governments or local municipalities, as well as corporations.A. Types of BondsSecured bonds: bonds secured by collaterals, such as a building, so that if firm defaults, bondholders are entitled to the value of the collaterals.Mortgage bonds: bonds secured by a lien on specific assets of the firm, such as real estate. Typically, the value of the real property is greater than that of the mortgage bonds issued. This provides the bondholders with a margin of safety in the event that market value of secured property declines.Debentures: unsecured long-term debt. They are viewed as being more risky than secured bonds and as a result must provide investors higher yield than secured bonds.Subordinated debentures: bonds that have a lower priority of claim on assets in the event of liquidation than do other senior debt holders. They are honored after the claims of secured debt and un-subordinated debentures have been satisfied.Zero and low coupon bonds: Allow the issuing firm to issue bonds at a substantial discount from their $1,000 face value with a zero or very low coupon.The disadvantage is, when the bond matures, the issuing firm will face an extremely large nondeductible cash outflow much greater than the cash inflow they experienced when the bonds were first issued.On the other hand, annual cash outflows associated with interest payments do not occur with zero coupon bonds.Junk bonds: bonds rated BB or below by S&P. The lower the rating, the higher their chance to default. Junk bonds are also called high yield bonds for the high interest rates they pay the investors because of their high risks.
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