What it is:

A perpetual bond is a debt with no maturity date. Such a bond is also referred to as a "consol."

How it works/Example:
A company may issue a perpetual bond which offers a coupon payment forever, at least
theoretically. The issuer does not have to redeem perpetual bonds, but is responsible for coupon
payments.
Perpetual bonds are used as a source of subordinated debt. Since it does not have to be repaid, it
is considered a source of Tier 1 capital (i.e. equity capital and disclosed reserves) for banks. For
banks, perpetual bonds help to fulfill the bank's capital reserve requirements. Even though they
are technically a form of debt, they qualify as "equity" on the bank balance sheet.
Although there is usually no set maturity date, perpetual bonds may be structured to allow the
bonds to be callable after a set period of time, usually between 5 and 10 years. This is especially
important if the interest rates fall sharply and the issuer needs to reduce the interest cost.

Why it Matters:
Historically, perpetual bonds have paid a higher than normal yield on comparable debt quality.
As a result, in a competitive market, they are an attractive source of capital.
What it is:

A bearer bond, often called a coupon bond, is a bond whose certificate includes small
detachable coupons. The coupons grant interest payments to the holder from the borrower.
How it works/Example:

Actual bearer bonds are uncommon today because nearly all bonds are registered electronically
rather than in certificate form. (although some bondholders still choose to receive paper
certificates). Therefore, the term coupon refers to the interest rate of a bond rather than the
physical nature of the certificate.
In the 1980s, some financial institutions started buying bearer bonds and selling the coupons as
separate securities, called strips.
Let's assume you purchase a $1,000 XYZ Company bearer bond. The coupon rate on the bond is
5%, which means the issuer will pay you 5% interest per year, or $50, on the face value of the
bond ($1,000 x 0.05). Even if your bond trades for less than $1,000 (or more than $1,000), the
issuer is still responsible for paying you $50 per year. To claim your interest payment, you would

simply clip off the appropriate coupon from the bond's certificate and show it to an agent of the
issuer.
Why it Matters:

Coupon bonds are called bearer bonds for a reason. That is, anyone who presents the coupon to
the issuer is entitled to the interest payment even if that person is not the owner of the bond.
Therefore, since bearer bonds offer many fraud and tax evasion opportunities, they are nearly
unheard of today.
Instead, modern bonds are usually registered bonds or book entry bonds. Registered bonds are
bonds with physical certificates that describe the terms of the debt, and the registered holder
receives interest payments automatically from the issuer. Book entry bonds are bonds that are
electronically registered to the financial institution acting on behalf of the investor. The investor
receives a receipt for his or her bond in lieu of a certificate, and the investor's account at the
financial institution receives the interest payment.
What it is:

Corporate bonds are debt instruments created by companies for the purpose of raising capital.
They are called fixed-income securities because they pay a specified amount of interest on a
regular basis.
How it works/Example:

The bond itself represents a loan agreement between the issuer and the investor, and the terms of
the bond obligate the issuer to repay the borrowed amount (the principal) by a specific date (the
maturity). Some bond maturities are short-term (a year or less), others are intermediate-term
(usually two to 10 years), and many are long-term (a period of 10 to 30 years or more). Bonds
with maturities of less than 10 years are typically called notes.
The face value, or par value, of a bond represents the amount to be repaid at maturity. Corporate
bonds usually have $1,000 face values, meaning that the issuer pays the holder $1,000 on the
maturity date. Baby bonds have face values of $500. Note that the face value is not the market
price of the bond.
Although issuers dont usually repay the principal until the maturity date, they do usually pay the
investor a specific amount of interest on a semiannual basis. (In some cases, when the bonds are
serial bonds, specific principal amounts become due on specified dates.) The interest rate, or
coupon rate, on a bond is the percentage of par, or face value, that the issuer pays the bondholder
on an annual basis.
For example, you purchase a 5% bond (that is, a bond with a 5% coupon rate) from Company
XYZ. The bond has a face value of $1,000. This means you will receive $50 in interest payments
per year ($1,000 x 0.05). Corporate issuers usually make payments in six-month installments,

meaning in our case that you would receive $25 in say, January, and the other $25 in June. The
prospectus, the indenture agreement and the bond certificate all disclose the payment schedule.
Covenants, which can be found in the prospectus and the indenture agreement, require the issuer
to do certain things and refrain from doing others.
Bond ratings are one way income investors can evaluate the risk of corporate bonds. Ratings
agencies like Moody's and Standard & Poor's (S&P) research and analyze bond issuers and then
grade their fixed-income securities.
Why it Matters:

In the grand scheme of investment choices, corporate bonds are relatively safe, liquid
investments, but of course this depends on several factors, including the income investor's
tolerance for risk and investment horizon. Corporate bonds are generally not safer than
government bonds, certificates of deposit, or most municipal bonds, because corporations are
more likely to default on their obligations than the U.S. government, local governments and
banks. The added risk means that corporate bonds typically offer higher returns than these
instruments.
Owning a company's debt is different in many ways from owning a company's stock. First,
bondholders cannot vote and they are not entitled to dividends. Second, debt ranks senior to
equity. This means that the bondholders are among the first in line to be repaid in the event the
issuer liquidates. Shareholders might receive some proceeds from the liquidation after this point,
if there is anything left. So seniority provides an extra level of security for bondholders, and this
is one reason corporate bonds are generally considered safer investments than stock.
Companies want to borrow as cheaply as possible, so they can get creative in how they structure
their bonds. For instance, a company might issue bonds that convert to other financial
instruments (like stock), pay interest on an unusual schedule or carry unusual covenants. Despite
the variety, there are some things that most corporate bonds have in common.