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Bonds: Major Classes
So many flavors to choose from:
- Senior obligation bonds aren't cranky or grey. They are the first type of bonds that a company would have to pay if they went bankrupt. These are often considered the most secure types of bonds for that reason.
- Junior obligation bonds are slightly less secure than senior bonds. If a company declares bankruptcy, the juniors are paid after seniors.
- Asset backed bonds are backed by the assets a company has. For example, an airline might guarantee its bonds via its airplanes.
- Debentures are backed only by the credit of a company, so basically the company is just handing you an IOU and promising to pay you back ("trust us"). And if they mess up and can't pay you back? Too bad, cupcake. The only comfort you would have in that situation is that the company's credit would be wrecked if they couldn't pay their debentures or other forms of bonds. That might be cold comfort to you, though (especially if your investments are wiped out and you can't pay your utility bill).
- Convertible bonds, like their name suggests, can be converted—usually into common stock. You can make a tidy profit converting bonds into stocks if a company suddenly starts to do well and stock prices increase.
- Zero coupon bonds don't pay you anything until the very end. Once they reach maturity, the pay back what you invested plus all the interest that has built up in one chunk. The problem is that some companies have a hard time paying back all these payments at once. Some set up special funds so that they have enough money once their bonds reach maturity.