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Bonds and Debentures

A bond is a loan to a government or company that is secured by the government’s power to tax or by specific company assets. Terms typically range from one year to 30 years.

Interest is usually paid at a fixed rate, determined when the bond is issued. The rate will depend on interest rates and the credit rating of the issuer at the time the bond is issued. For example, the rate will be relatively higher if there is a greater risk that the issuer will default on its payment obligations.

If the company is dissolved, bondholders have a right to a portion of the company’s remaining assets. They rank behind tax authorities, employees and creditors but ahead of preferred and common shareholders.

A debenture is a loan to a company that is not secured by specific assets, but may be secured by the issuer’s general assets. Debentures work the same way as bonds.

This has been the fifth post in our Investments at a Glance Series. Next, we look at more complex fixed income securities: mortgage-backed securities and stripped bonds.

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