A corporate bond is considered short-term corporate when the maturity is less than five years; intermediate is five to 12 years, and long-term is over 12 years. Corporate bonds are characterized by higher yields than government securities because there is a higher risk of a company defaultingthan a government. The upside is that they can also be the most rewarding fixed-income investments because of the risk the investor must take on, where higher credit companies that are more likely to pay back their obligations will carry a relatively lower interest rate than riskier borrowers. Companies can issue bonds with fixed or variable interest rates and of varying maturity. Bonds issued by highly rated companies are referred to asinvestment gradewhile those below investment grade arejunkorhigh-yield.Convertible bondsare debt issued by corporations that give the bondholder the option to convert the bonds into shares of common stock at a later date. The rate at which investors can convert bonds into stocks, that is, the number of shares an investor gets for each bond, is determined by a metric called the conversion rate. The conversion rate may be fixed or change over time depending on the terms of the offering. A conversion rate of 30 means that for every $1,000 of par value the convertible bondholder converts, she receives 30 shares of stock. It is not always profitable to convert bonds into equity. Investors can determine the breakeven price by dividing the selling price of the bond by the conversation rate. Typically, investors will exercise this option if the share price of the company exceeds the breakeven price. Convertible bonds typically carry lower yields due to this right given to investors.Callable bondsare bonds that can be redeemed by the issuer at some point prior to its maturity. If interest rates have declined since the company first issued the bond, the company is likely to want to refinance this debt at a lower rate of interest. In this case, the company calls its current bonds and reissues them at a lower rate of interest. Callable bonds typically have a higher interest rate to account for this added risk to investors. When homeowners refinance a mortgage, they are calling in their older debt for a new loan at better rates. Putable bondsallow the bondholder to force the issuer to repurchase the security at specified dates before maturity. The repurchase price is set at the time of issue, and is usually par value, and generally works to the favor of investors. Therefore, yields on these bonds tend to be lower.A third category of bonds is issued by banks or other financial sector participants and are referred to asasset-backed securitiesor ABS. These bonds are created by packaging up the cash flows generated by a number of similar assets and offering them to investors. If such a bond is backed by a
number of mortgages, they are known asmortgage-backed securitiesor MBS. These bonds are typically reserved for sophisticated or institutional investors and not individuals.