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Finance a la shmoop what are the major classes of bonds? well there's world

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history advanced trig intro to growing a moustache but of course that's just for [Books appear on table]

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college bound bonds who are trying to impress the top tier universities well

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in terms of bond classes in the real world there are so many flavors to

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choose from first we've got senior obligation bonds [Man walking in street and senior obligation bond appears]

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and these guys aren't cranky or gray-haired they are the first type of

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bonds that a company would have to pay if they went bankrupt they're often

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considered the most secure types of bonds for just that reason so they pay [Senior obligation bond stamped with most secure]

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less interest then there are junior obligation bonds which are slightly less

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secure than senior bonds so they've paid a little bit more rent on the money if a

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company declares bankruptcy the juniors are paid after the seniors duh...

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sophomores, freshmen get behind them asset-backed bonds are a different thing

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and they're backed by the assets a company has for example an airline might [Plane landing on runway]

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guarantee its bonds via the airplanes it owns if it owns them all right moving on

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then we have debentures which are backed only by the creditworthiness of the

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company so basically the company is just handing you an IOU and promising to pay [People shaking hands]

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you back with a handshake trust us yeah sure so debentures have to pay

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even more interest and if the company messes up and can't pay you back well

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too bad cupcake the only comfort you would have in that situation is that the

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company's credit would be wrecked forever if they couldn't pay their [Miley Cyrus swinging on wrecking ball]

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debentures or other forms of bonds at the end of the CEOs career and pretty

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much all the management and so on so they would really hate to go bankrupt yet

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with the debenture yeah and that that all might be cold comfort to you though

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especially if your investments were the ones wiped out by them not paying their [Woman appears at office desk]

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debentures and well then you can't pay your utility bill all right moving on

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convertible bonds like their name suggests can be converted usually into

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common stock at a given price to the given time period you can make a tidy

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profit converting bonds into stocks if a company suddenly starts to do well and

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stock prices really increase like we had $1,000 per bond convertible into 20 [1,000 dollar par bond appears]

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shares of stock well when the stocks only at 10 bucks that's not

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very attractive but if that stock went to $50 it'd be like break-even if I went

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to $100 while the bond converts and you'd double your money there...

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all right well finally there are zero

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coupon bonds which don't pay you anything until the very end you buy them

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at a big discount like six hundred twelve dollars and then they pay par

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a thousand dollars like ten years later once they reach maturity they pay back

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what you invested plus all the interest that is built up in one chunk... think

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high school dating the problem is that some companies have a hard time paying [Man stood beside vault of cash]

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back all these payments at once and you get no interest payment along the way

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with a zero coupon bond so they tend to pay even more interest which is good for

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the person lending the money assuming that they actually get paid back their [Interest money transfers from borrower to lender]

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interest in principal at the end of the zero coupon right well some company set

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up special funds like bond sinking fund equivalents so that well they have [Cash falling]

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enough money at the end to pay back their bonds once those bonds reach maturity

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unlike the writers here at Shmoop you know the maturity thing will never

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happen [Shmoop worker using PC]

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