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Suppose a friend of yours is looking to invest $5,000 such that it will provide current income and increase the diversification of his assets. He
Suppose a friend of yours is looking to invest $5,000 such that it will provide current income and increase the diversification of his assets. He has heard a lot about corporate bonds but wants to learn more before purchasing them. Fill in the blanks in the following conversation to give your friend the appropriate information regarding corporate bonds. Friend: Can you explain to me the basics of how a corporate bond will increase my current income? You: Under a standard bond agreement, if you were to purchase a 10-year, $5,000 corporate bond with a 9% coupon, you would receive in interest each year, and at the end of the 10-year period, you would receive the par value of Friend: OK, and am I guaranteed to receive these interest payments and the par value? You: Well, many corporate bonds are issued as debentures, which have standing, meaning that they backed by a legal claim on some specific property. A special type of corporate bond, known as a bond, comes with a provision allowing you to convert them into a certain amount of stock. Friend: Are there any other general features I should be aware of? You: Corporate bonds can be issued in a wide variety of forms. As far as general features go, they tend to come in denominations of and many have call provisions so that the issuers can't retire the bond (by paying you back and ceasing to pay interest payments) within the first 5 or 10 years of the issue date. Such bonds Friend: So if the interest rate were to fall and the issuer were able to retire my bond, I would be than if I were to continue holding the bond, because if I reinvest the money the issuer returns to me, I would receive a interest rate. You: , but this generally Exactly. In such a case, the issuer would pay you a would not fully compensate vou for vour loss
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