Corporate Bonds: Importance of the Prospectus
A prospectus is a legal document that explains the investment offered to the investors. Corporate bonds also have this, and this is very important for those who are planning to invest in corporate bonds. Read on to learn more about corporate bond prospectuses.
Types of Prospectuses
When you’re looking at bonds, there are two specific types of prospectuses. Here they are:
Preliminary Prospectus
As the name implies, the preliminary prospectus is the first or initial prospectus that is used by the issuer. It usually contains most of the details of a bond offering by a company.
Final Prospectus
After a deal on a security offering has been finalized and the corporate bonds can be sold on the market, a final prospectus is issued. This replaces the preliminary prospectus, making it one of the most important prospectuses for investors to check.
Importance of the Prospectus
Even if sometimes they are difficult to understand, it is of extreme importance for investors to study a corporate bond’s prospectus as meticulously as possible since it can be the closest thing they can get as a guide on how the specific bond can work.
The prospectus’ job is to offer all essential information that you as an investor might need regarding the issuer and the bond. Such information includes the where the company plans to use the money they will get from the bond.
Important Areas to Pay Attention to
The prospectus has many parts, but the following are the key areas you need to pay attention to.
Risks, Features, and Indicators Risks
All features include the corporate bond’s outlook, which help determine the future favorability in the market, plans for how to earn the repayment funds, the corporate bond’s credit rating info, price projections, and the bond issuer’s liquidity and performance. This also includes whether the bond is insured or not.
These features are important to help you determine how the bond will be valued in different positive or negative circumstances that may happen over the lifetime of the bond.
Timing and Conditions of Interest Payments
Checking the prospectus is a great way to learn about the corporate bond’s coupon or interest rate. Since the yield is dictated by the corporate bond’s face value and its interest rate, this is very crucial information. You should also find details of payment schedules that is a common feature of corporate bonds.
Date of Maturity
The corporate bond’s lifespan is based on its date of maturity. This tells us exactly how long the bond must be held for the principal to be paid in full. Upon this date, the principal and all the final interest payments due must be made.
Normally, there are three ranges of maturity dates: short-term, medium-term, and long-term. The shortest can be around one year in length. This is a key piece of information because, for example, a bond with a maturity date of four years will be able to pay back the principal in half of the time of one that has a maturity date of eight years.
Call Provisions/Protection
There are times when a bond issuer provides a corporate bond with a special provision that enables them to put an “early call” on it. In this instance, the maturity date will become invalid and the principal will be paid back.
These provisions offer issuers a way to get out from the obligation of making interest payments. This may leave you in a jam if you are depending on those payments for capital.
