Bonds

Bonds are another traditional debt vehicle companies use to build capital. Bonds are long-term contracts between a borrower and a financer in which the borrower pays a stated interest rate over the period of the bond to the bond holder. Companies often hire investment bankers to set up and issue these bonds to the public so they can receive the capital back without having to market the bonds directly to the investment community. A few different types of bonds include mortgage bonds, debentures, and subordinated bonds.

Mortgage Bonds

Debentures

Subordinated Bonds

Mortgage bonds carry collateral backing through the funds people use to purchase homes. Large investment companies often package several mortgages into issues for resale to the general public. These bonds pay a fixed interest rate based on the underlying mortgages they represent.

Debentures are unsecured debt that represents no underlying asset. Debentures are simply loans an issuer or company takes in good faith. This debt typically carries a higher risk to investors if the company default and the loan has no security.

Subordinated bonds carry a security feature. An underlying asset typically supports the bonds. This support helps reduce the risk of investors losing their principle in the event of a default. In this situation, the bond holder can claim the underlying assets. Subordinated bonds are more risky, as they are paid after other debts have been paid to senior debt holders