Collateral Trust Bonds And Debentures

by David Jenyns on November 1, 2009

Others might have simply income-producing stocks and bonds held as investments.

In ordinary circumstances, with pledged bonds ahead of it, the debenture would have to be considered the lowest-ranking bond. Today most bonds mature in 20 to 40 years. Railroads and utilities may offer them over longer terms; industrial bonds tend to have a shorter life.

Sinking-fund bonds, as noted, mean that the company is paying periodically into an earmarked account the funds with which it expects to redeem the bonds at maturity. The call provision found in most bonds today permits the company to call in, or redeem, the issue at its convenience by paying the principal plus a premium.

Collateral bonds offering a conversion privilege may be exchanged for the company’s common stock whenever the holder wishes. Many investors like this double-barreled opportunity because it gives them a full measure of safety plus the chance to improve their return if the company’s dividends should increase or if inflation should make cheaper, but more plentiful, dividend dollars desirable.

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