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Corporate Bonds — These bonds are issued by corporations and are used to raise capital for the issuing companies. They range from investment grade to junk grade depending on the issuing companies.As a general rule they are riskier than treasuries and munis, but one must always consider who has issued the specific bond and what its ratings are. For example, bonds issued by companies such as GE or IBM are considered very safe considering the long-established nature of these corporations, while those issued by less well known companies are mostly junk bonds. As companies issuing junk bonds become more credit-worthy, their bonds gain quality and rise in price while their yields correspondingly decline. The reverse is also true for high quality bonds gone bad, which may attain higher yields as their prices drop. The interest on corporate bonds is subject to federal, state, and local taxes.

Bond Characteristics

As we mentioned before, bonds can be classified in several ways. In the last section we looked at the main bond types with regards to their issuers. However bonds have different features or characteristics depending on the specific issuing organizations or institutions. Here is a list of some of the better known features:

Secured Bonds — Also known as asset-backed bonds, they are issued using specific properties or assets as collateral. The best known example of this type of bond is a mortgage bond where the bond is backed by a pool of mortgages (e.g., bonds issued by Freddie Mac or Fannie Mae). These bonds have a high degree of safety since the bondholders have the right to sell the pledged property in case of default.

Unsecured Bonds — Also known as debenture bonds, they are backed solely by the general credit-worthiness of the issuer. Regular corporate bonds are an example of unsecured bonds. …