Corporate bonds corporate bonds are issued by

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Corporate BondsCorporate bondsare issued by investor-owned businesses, while municipal bondsare issued by governments andgovernmental agencies other than federal. In the following sections, the primary focus is on corporate bonds, but much of thediscussion also is relevant to municipal bonds. The unique features of municipal bonds will be discussed in a later section.Although corporate bonds generally have maturities in the range of 20 to 30 years, shorter maturities, as well as longermaturities, are occasionally used. In fact, in 1995 HCA (then Columbia/HCA) issued $200 million worth of 100-year bonds,following the issuance of 100-year bonds by Disney and Coca-Cola in 1993. Since then, several other corporations haveissued such bonds. These ultra-long-term bonds had not been used by any firm since the 1920s. Unlike term loans, bondsusually pay only interest over the life of the bond, with the entire amount of principal returned to lenders at maturity.Most bonds have a fixedinterest rate, which locks in the rate set at issue for the entire maturity of the bond and minimizesinterest payment uncertainty. However, some bonds have a floating, or variable, ratethat is tied to some interest rate index, sothe interest payments move up and down with the general level of interest rates. Floating-rate bonds are more prevalent whenrates are high, when the yield curve (which is discussed in the chapter supplement) has a steep upward slope, or when both ofthese conditions are present. We have more to say about floating-rate bonds in our discussion of municipal bonds.Some bonds do not pay any interest at all but are sold at a substantial discount from face (principal) value. Such bonds, calledzero-coupon bonds, provide the bondholder (lender) with capital appreciation rather than interest income. For example, azero-coupon bond with a $1,000 face value and ten-year maturity might sell for $385.54 when issued. An investor who buys thebond would realize a 10 percent annual rate of return if the bond were held to maturity, even though she would receive nointerest payments along the way. (Note though, for tax purposes, the difference between par value and the purchase price isamortized and treated as interest income.) Other bonds, instead of paying interest in cash, pay coupons that grant the lenderadditional bonds (or a proportion of an additional bond). These bonds are called payment-in-kind (PIK)bonds. PIK bondsusually are issued by companies that are in poor financial condition and do not have the cash to pay interest; they tend to bequite risky.In rare cases, bonds have step-up provisions, which stipulate that the interest rate paid on the bond is increased if the bond'sHealthcare Finance: An Introduction to Accounting & Financial Management, Sixth EditionReprinted for ZIV54/29007015801288, York UniversityHealth Administration Press, The Foundation of the American College of Healthcare Executives (c) 2016, Copying ProhibitedPage 4 of 30

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