a written acknowledgement of a debt, usually given under the company's seal, containing provisions for payment of interest and repayment of principal. The debt may be secured on some or all of the company's assets.
|Type||Secured Bonds||Unsecured Bonds|
● Can be secured by one or more
specific asset （e.g. over property）, this is known as a fixed charge.
● Secured by a class of assets （e.g. net current assets or working capital）, this is known as a floating charge.
● On default, the assets used as security are sold and the proceeds applied towards repaying the debt.
● No voting rights.
● No security.
● Holders have the same rights as ordinary creditors.
● No voting rights.
|Income||● A fixed annual amount （interest）, usually expressed as a percentage of nominal value.||● A fixed annual amount （interest）, usually expressed as a percentage of nominal value.|
In the UK, bonds are usually issued with a face value of £100.
They can be traded on the bond market and reach a market price.
Hence, if a bond is "selling at a premium of 15%", this means that a bond with a face value of £100 is currently selling for £115.
This indicates that the rate of interest on this bond is attractive when compared with current market rates, creating demand for the bond and a rise in price.*
In the US the face value of a bond is usually $1,000.
2. Deep Discount Bonds
Deep discount bonds—bonds issued at a large discount to nominal value (i.e. issued well below face value) and redeemable at par on maturity.*
With deep discount bonds, investors receive a large capital gain on redemption, but are paid a low rate of interest, if any, during the term of the loan.
These bonds offer a cash flow advantage to the borrower. This is especially useful for financing projects which produce weak cash flows in early years.
Zero-coupon bonds—bonds issued at a discount to face value and which pay zero annual interest.
Zero-coupon bonds have the following advantages:
The issuing company pays no interest and the only cash payout is at the bonds' maturity.
Investors gain from the difference between issue and redemption price.