General Securities Representative Exam/Debt Securities
Another method a corporation can raise capital is through Debt Securities which are also called bonds. Bonds are loans to the corporation made by the investor to be repaid at a stated future date at a set interest rate. Although, bonds are not limited to corporations. The U.S. government can issue government bonds. Also municipalities such as states, cities, and such can issue municipal bonds. Bonds can also be called funded debt, and are considered long term debt because they are usually issued for at least 5 years or more. Bonds are rated by Moody's, S & P and Fitch.
Each bond has a document or certificate that describes the terms and conditions of the loan. This document is called an indenture.
Some items to consider when investing in a bond are:
- Reinvestment risk
- Callable risk
- Interest rate risk
- Default risk
Convertible bonds are bonds that corporations issue that give the investor the right to convert the bonds to common stock.
A corporation can also issue commercial paper, which is generally traded overnight and used to shore up financing and cash, and has a maturity of less than 1 year.