Question

Use your own words to explain the following

1. Corporate bond
2. Secured creditors
3. Bond credit rating
4. Junk bond
5. Common stock
6. Preferred stock
7. The difference between common stock and preferred stock

Answer 1

Corporate Bonds are securities issued by company to raise funds. Companies pay annual coupons to investors . The cost of debt of a corporate depends on the risk or credit rating of the bond. Higher is the risk higher is the cost of debt.

Secured creditors involve providing credit or loan which are asset backed. Creditors provide collateral based loans. This protects the interests of the creditors in case the borrower defaults. Usually banks are secured creditors.

Bond credit rating : Based on the risk of a company , the debt repaying capacity of company, interest coverage ratio bonds are rated by the credit rating agencies. More is the risk the bonds have poor credit rating and hence interest rate of bond increases. Lower is the risk of bond higher is the credit rating of bond and lower is the interest rate of bond.

Junk Bond: Bonds issued by lower rated companies . They have high risk involved hence YTM for such bonds are very high.The risk of default of such bonds is very high.