SIE (Training Consultants v3.5, 2025): Ch. 2 Debt Securities, Sec. 4 - Types of Corporate Bonds

Secured Bonds

Corporate bonds backed by collateral or guarantees, considered more conservative investments.

Mortgage Bond

Debt secured by a mortgage on real property of the issuing corporation.

Closed-End Mortgage Bond

Property cannot be used as collateral for future loans unless subordinate (e.g., 2nd or 3rd mortgage).

Open-End Mortgage Bond

Property can secure subsequent loans; all debts have equal claim, creating higher risk and higher yield.

General Mortgage Bond

Pledges all mortgageable properties of a corporation without naming specific lots.

Equipment Trust Certificate

Debt issued by transportation companies to purchase equipment; secured by equipment with trustee holding title until maturity.

Collateral Trust Certificate

Debt secured by stocks/bonds of other corporations owned by the issuer, held in trust.

Guaranteed Bond

Bond guaranteed by another company, often a parent company.

Parity Bond

Bonds issued with equal claim or rights as previously issued bonds.

Debenture

Unsecured corporate debt backed only by the good faith and credit of the issuer.

Subordinated Debenture

Junior debenture with a lower claim than other debentures; paid only after higher-level claims.

Junk Bond / High-Yield Bond

Debt issued by companies with weak credit or short track record; rated BB or lower.

Fallen Angel

Bond originally investment grade but later downgraded to junk status.

Income / Adjustment Bond

Bond that pays interest only if earnings are sufficient and declared by the board; trades flat; principal due at maturity.

Zero-Coupon Bond

Sold at deep discount, pays no interest, accrues value by accretion, and matures at face value.

Accretion

Process of increasing the value of a zero-coupon bond as imputed interest accumulates.

Phantom Income

Taxable imputed interest on zero-coupon bonds even though no cash interest is received.

Zero-Coupon Bond Volatility

Most volatile fixed-income security due to discount pricing, no semiannual interest, and sensitivity to interest rate changes.

Zero-Coupon Bond Quote

Identified with “z” (e.g., ABC zr 27 = ABC zero-coupon bond maturing 2027).

What are secured bonds?

Bonds backed by collateral or guarantees.

What is a mortgage bond?

A corporate debt secured by real property.

What is a closed-end mortgage bond?

Property cannot secure future loans unless subordinate.

What is an open-end mortgage bond?

Property can secure future loans with equal claim; higher risk and yield.

What is a general mortgage bond?

Pledges all mortgageable properties as collateral without specifying lots.

What is an equipment trust certificate?

Debt used to purchase transportation equipment, secured by that equipment, with trustee holding title until maturity.

What is a collateral trust certificate?

Debt secured by securities owned by the issuer, deposited with a trustee.

What is a guaranteed bond?

Bond guaranteed by another company, often a parent.

What is a parity bond?

Bond with equal claim as previously issued bonds.

What is a debenture?

Unsecured corporate debt backed only by the issuer’s good faith and credit.

What is a subordinated debenture?

Junior debenture repaid only after senior debentures.

What are junk bonds?

High-yield bonds issued by companies with poor credit or little history, rated BB or lower.

What is a fallen angel?

Bond downgraded from investment grade to junk.

What is an income or adjustment bond?

Bond that pays interest only if earnings are sufficient and declared; trades flat.

Do income bonds still pay principal at maturity?

Yes, principal is due at maturity.

How do zero-coupon bonds pay interest?

They do not pay periodic interest; they are issued at discount and accrete value until maturity.

What is accretion?

The buildup of imputed interest on a zero-coupon bond.

What is phantom income?

Taxable income on zero-coupon bonds based on imputed interest with no actual cash received.

Which type of bond is most volatile?

Zero-coupon bonds.

How are zero-coupon bonds quoted?

With “z” in the quote (e.g., ABC zr 27).

At maturity, what does a zero-coupon bond pay?

One lump sum equal to initial investment plus imputed interest.

How do you determine if a zero-coupon bond is trading at premium or discount?

Compare its price to the accreted value based on original yield.