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Finance: What are the Major Classes of Bonds? 8 Views

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What are the Major Classes of Bonds? Insofar as US dollar denominated bonds go, the primary classes of bonds are: 1) US Treasury Bonds; 2) US Treasury Notes and other US government debt; 3) Investment Grade Corporate Bonds (BBB- or higher); 4) High Yield (aka Junk) bonds (CCC+ or lower); 5) Mortgage Bonds, 6) Sovereign Bonds of other countries; 7) Municipal Bonds (issued by states, cities, and other municipalities). Non-US dollar bonds may incorporate combinations of the above as well as intangibles and assets not recognized under US GAAP accounting rules.

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00:00
Finance a la shmoop what are the major classes of bonds? well there's world
00:08
history advanced trig intro to growing a moustache but of course that's just for [Books appear on table]
00:14
college bound bonds who are trying to impress the top tier universities well
00:18
in terms of bond classes in the real world there are so many flavors to
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choose from first we've got senior obligation bonds [Man walking in street and senior obligation bond appears]

00:26
and these guys aren't cranky or gray-haired they are the first type of
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bonds that a company would have to pay if they went bankrupt they're often
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considered the most secure types of bonds for just that reason so they pay [Senior obligation bond stamped with most secure]
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less interest then there are junior obligation bonds which are slightly less
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secure than senior bonds so they've paid a little bit more rent on the money if a
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company declares bankruptcy the juniors are paid after the seniors duh...
00:50
sophomores, freshmen get behind them asset-backed bonds are a different thing
00:55
and they're backed by the assets a company has for example an airline might [Plane landing on runway]
01:00
guarantee its bonds via the airplanes it owns if it owns them all right moving on
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then we have debentures which are backed only by the creditworthiness of the
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company so basically the company is just handing you an IOU and promising to pay [People shaking hands]
01:14
you back with a handshake trust us yeah sure so debentures have to pay
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even more interest and if the company messes up and can't pay you back well
01:22
too bad cupcake the only comfort you would have in that situation is that the
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company's credit would be wrecked forever if they couldn't pay their [Miley Cyrus swinging on wrecking ball]
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debentures or other forms of bonds at the end of the CEOs career and pretty
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much all the management and so on so they would really hate to go bankrupt yet
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with the debenture yeah and that that all might be cold comfort to you though
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especially if your investments were the ones wiped out by them not paying their [Woman appears at office desk]
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debentures and well then you can't pay your utility bill all right moving on
01:49
convertible bonds like their name suggests can be converted usually into
01:55
common stock at a given price to the given time period you can make a tidy
01:59
profit converting bonds into stocks if a company suddenly starts to do well and
02:03
stock prices really increase like we had $1,000 per bond convertible into 20 [1,000 dollar par bond appears]
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shares of stock well when the stocks only at 10 bucks that's not
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very attractive but if that stock went to $50 it'd be like break-even if I went
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to $100 while the bond converts and you'd double your money there...
02:20
all right well finally there are zero
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coupon bonds which don't pay you anything until the very end you buy them
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at a big discount like six hundred twelve dollars and then they pay par
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a thousand dollars like ten years later once they reach maturity they pay back
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what you invested plus all the interest that is built up in one chunk... think
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high school dating the problem is that some companies have a hard time paying [Man stood beside vault of cash]
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back all these payments at once and you get no interest payment along the way
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with a zero coupon bond so they tend to pay even more interest which is good for
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the person lending the money assuming that they actually get paid back their [Interest money transfers from borrower to lender]
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interest in principal at the end of the zero coupon right well some company set
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up special funds like bond sinking fund equivalents so that well they have [Cash falling]
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enough money at the end to pay back their bonds once those bonds reach maturity
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unlike the writers here at Shmoop you know the maturity thing will never
03:14
happen [Shmoop worker using PC]
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