Figure

Ratio of yields on tax-exempt to taxable bonds corporate bonds

Long-term debt issued by private corporations typically paying semiannual coupons and returning the face value of the bond at maturity.

coupons over their lives and return the face value to the bondholder at maturity. Where they differ most importantly from Treasury bonds is in risk.

Default risk is a real consideration in the purchase of corporate bonds. We treat this issue in considerable detail in Chapter 9. For now, we distinguish only among secured bonds, which have specific collateral backing them in the event of firm bankruptcy; unsecured bonds, called debentures, which have no collateral; and subordinated debentures, which have a lower priority claim to the firm's assets in the event of bankruptcy.

Corporate bonds sometimes come with options attached. Callable bonds give the firm the option to repurchase the bond from the holder at a stipulated call price. Convertible bonds give the bondholder the option to convert each bond into a stipulated number of shares of stock. These options are treated in more detail in Part Three.

Figure 2.7 is a partial listing of corporate bond prices from The Wall Street Journal. The listings are similar to those for Treasury bonds. The highlighted AT&T bond has a coupon rate of 6/2% and a maturity date of 2029. Only 37 AT&T bonds traded on this day. The closing price of the bond was 90/2% of par, or $905, which was up K of a point from the previous day's close. In contrast to Treasury bonds, price quotes on corporate bonds use explicit fractions.

The current yield on a bond is annual coupon income per dollar invested in the bond. For this bond, the current yield is calculated as

Current yield

Annual coupon income 65

Price

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