Question

Corporate bonds are classified as “structured” investments; explain their importance to asset portfolios and what is the value of a warrant that is issued with a corporate bond to investors and to the issuing corporation?

Explain with examples.

Answer 1

Most corporate bonds are issued with a term of 20–30 years, and specify the periodic payment of a percentage of par or face value. Bonds may be issued with a call provision, which allows the issuer to redeem the bond earlier than at maturity. There are also bonds with put features, which allow the buyer to sell the issue back to the issuer at par, with certain conditions. A bond with a sinking fund provision requires the issuer to redeem a predetermined amount prior to maturity. Convertible bonds have a provision that grants the buyer an option to convert the bond to shares in the issuing company. This feature is similar to warrants which also are options to purchase stock. Trading in the secondary market for corporate bonds occurs in the over-the-counter market and has less liquidity than in many other markets. It is still dominated by broker-dealers using telephone and chat messaging services, although bond-trading platforms have made some inroads. These platforms have several different models: Single dealer platforms allowing a specific dealer to offer online access to its clients; interdealer systems allowing only the large dealers to trade with each other; dealer–client systems which are open to buy-side institutional clients as well as dealers; and auction systems. Whether executed on a platform or through traditional means, reporting of corporate bond transactions is required on the Trade Reporting and Compliance Engine operated by the Financial Industry Regulatory Authority.

An intermediate debt instrument between Commercial Paper and longer maturity bonds is the Medium Term Note. These notes have lower costs associated with them and afford the issuer more flexibility in term and size of the offering