What are the different types of corporate bonds?

Corporate bonds can vary greatly in terms of structure and risk. Below are some of the types you might encounter.

Senior bonds

Senior bonds give investors the first claim to a company’s assets should it go out of business, ahead of other lenders and shareholders.

Senior secured

These bonds are secured against the issuing company’s property, so if the company does go into liquidation you’d be ahead of other lenders in the queue to be repaid.

Senior unsecured

These corporate bonds aren’t secured against the issuing company’s property, but you still rank ahead of other unsecured bondholders in the queue to be repaid.

Subordinated

Subordinated bondholders are the last of all bondholders to have a claim on the issuing company’s assets if it goes out of business.

They are still ahead of shareholders and other creditors, such as vendors that serve the company.

Subordinated bondholders might get some money back once senior secured and unsecured bondholders have been repaid, prior to other company debts being paid.

Investment grade bonds

Before they are first issued, bonds are given a credit rating by rating agencies Standard & Poor’s (S&P), Moody’s and Fitch.

The ratings give investors an idea of how risky the bonds are, reflecting an issuer’s capacity to maintain payments and avoid default.

The best possible rating is AAA from S&P and Fitch and Aaa from Moody’s, indicating that the issuer is extremely likely to meet its financial commitments.

Any rating of BBB- or higher from S&P or Baa3 from Moody’s represents an ‘investment grade’ bond, suggesting that the issuer is in a relatively strong financial position.

High-yield bonds

Also sometimes referred to as ‘junk’ bonds, high-yield bonds have a lower rating than investment grade bonds, indicating a higher risk of the issuer defaulting on payments.

This can apply to senior, unsecured, subordinated or any other type of corporate bond.

Junk bonds have a rating of or below BB from S&P and Fitch and Ba from Moody’s. They pay a higher rate of interest to compensate investors for the higher level of risk.

Convertible bonds

Convertible bonds can be converted into a fixed number of ordinary shares in the same company at a set price.

The specific terms of the conversion would be outlined when a bond is issued.

These bonds give investors regular income but also the chance of capital growth if they are converted into shares.