Corporate securities
Also known as: corporate issues
Corporate securities are the investment instruments a corporation issues to raise capital, including equity securities such as common and preferred stock and debt securities such as bonds, debentures, and commercial paper. Investors buy them for growth, income, or both.
Corporate securities are financial instruments issued by a business corporation to raise money. They fall into two broad families: equity securities, which represent ownership in the company (common stock and preferred stock), and debt securities, which represent a loan to the company (bonds, notes, and short-term commercial paper). Some instruments, such as convertible bonds and convertible preferred stock, blend features of both.
On the debt side, corporate securities are classified by what backs them. Secured bonds pledge specific property: mortgage bonds are backed by real estate, equipment trust certificates by rolling stock or machinery, and collateral trust certificates by securities the issuer holds. Unsecured bonds — called debentures — are backed only by the issuer's general credit and full faith. Variations include income bonds, which pay interest only when earnings permit, and guaranteed bonds, where a parent or third party promises payment.
Because corporate securities carry credit risk, they generally offer higher yields than U.S. Treasury securities of the same maturity. Corporate interest is also fully taxable at federal, state, and local levels, unlike municipal bond interest, and corporate bonds trade mostly over the counter rather than on an exchange. In a liquidation, secured bondholders are paid first, then debentures, then preferred stockholders, and common stockholders last.
Corporate securities are foundational content on securities licensing exams. The SIE, Series 6, Series 65, and Series 66 all expect you to distinguish secured from unsecured corporate debt, rank claims in a liquidation, compare taxation of corporate and municipal interest, and recognize how convertible features affect an investor's position.
Key takeaways
- Corporate securities include both equity (common and preferred stock) and debt (bonds, notes, and commercial paper) issued by a corporation.
- Secured corporate debt pledges specific assets, while a debenture is backed only by the issuer's general creditworthiness.
- Interest on corporate bonds is fully taxable, and corporate debt typically yields more than comparable Treasury securities because of credit risk.
- In a liquidation, secured creditors are paid before debenture holders, who are paid before preferred and then common stockholders.