What Are Key Bond Terms for a Trust?
3 of 7 in Series: The Essentials of Holding and Diversifying Trust Assets
Investing in bonds can be one of the safest and easiest ways to invest, yet many people shy away from these investments because they may not understand all the words used in their descriptions. This article explains the following terms: face amount, issue date, maturity date, bills, notes, bonds, prerefunded, convertible, and subordinate.
All bond descriptions carry certain required information that can tell you a great deal about what you’re buying. They should all have a face amount, which is the amount of money the bond issuer promises to repay you when the bond matures. They also give an issue date, or the date the loan was created, and a maturity date, or the date the loan will be repaid, plus the interest rate.
Bonds come in three varieties, based on how long you hold them. Bills are issued for a period of one year or less. Notes are issued for periods of less than ten years. Bonds are issued for periods of ten years or greater. Both bonds and notes are issued at their face value and pay interest semiannually based on the date of maturity, not the date of issue. Bills, on the other hand, are purchased at a discount, and only pay interest at maturity, when you receive the full face value of the bill.
Some bonds are prerefunded. Even though they’re issued with a stated maturity date, the issuing authority has the option of paying off the loan early, at the specified prerefund dates. Other bonds are convertible, which means the corporation may exchange them for its common or preferred stock at its own instigation.
When corporations convert their bonds, bondholders always have the option to take cash rather than stock. Corporate bonds may also be subordinate, causing this particular bond issue to stand behind other debts of the corporation. In other words, if the corporation goes bankrupt, the subordinated bondholders don’t get any of their money back until other corporate debts are paid first.