FAQs • Why issue bonds? (2024)

FAQs

FAQs • Why issue bonds? ›

The purpose of a bond issue is to borrow money to finance major capital projects. A capital project is generally defined as a project expected to have a useful life of 10 years or more which is estimated to cost in excess of $100,000.

Corporate bonds are issued by corporations to raise money for funding business needs. Government bonds are issued by governments to fund the government's needs, such as to pay for infrastructure projects, government employee salaries, and other programs.

The purpose of issuing a bond is to raise money. When a company or government issues a bond, they are essentially borrowing money from investors. The bond serves as a contract outlining the terms of the loan, including the interest rate and repayment schedule.

Corporate bonds are bonds issued by companies. Companies issue corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business. Corporate bonds are debt obligations of the issuer—the company that issued the bond.

Bonds have some advantages over stocks, including relatively low volatility, high liquidity, legal protection, and various term structures. However, bonds are subject to interest rate risk, prepayment risk, credit risk, reinvestment risk, and liquidity risk.

Bonds can provide a means of preserving capital and earning a predictable return. Bond investments provide steady streams of income from interest payments prior to maturity.

The Bottom Line. Bonds can contribute an element of stability to almost any diversified portfolio – they are a safe and conservative investment. They provide a predictable stream of income when stocks perform poorly, and they are a great savings vehicle for when you don't want to put your money at risk.

Bonds are a kind of debt instrument and are majorly issued by governments and corporations to borrow money. The raised fund is then utilized for multiple objectives that may include buying property and equipment, running new projects, research and development, etc.

Bonds are issued by governments and corporations when they want to raise money. By buying a bond, you're giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year.

Instead of borrowing from banking institutions, companies can borrow from investors and only pay lower interest rates. Moreover, depending on their preference, the issuing company can decide the bond's maturity period from 3 to 30 years. This also gives them control of their debts.

Why issue bonds instead of loans? ›

Banks place greater restrictions on how a company can use the loan and are more concerned about debt repayment than bondholders. Bond markets tend to be more lenient than banks and are often seen as easier to deal with. They leave it to the rating agencies to grade the bonds and make their decisions accordingly.

Government bonds assist in funding deficits in the federal budget and are used to raise capital for various projects such as infrastructure spending. However, government bonds are also used by the Federal Reserve Bank to control the nation's money supply.

Raising Capital:

The most straightforward reason for issuing bonds is to raise money for various needs such as financing ongoing operations, expanding into new markets, or launching new products. Unlike equity financing, issuing bonds allows a company to raise capital without diluting ownership.

Risk Considerations: The primary risks associated with corporate bonds are credit risk, interest rate risk, and market risk. In addition, some corporate bonds can be called for redemption by the issuer and have their principal repaid prior to the maturity date.

Bond basics

Bonds are generally issued for a fixed term longer than ten years, and are as such categorized as long-term debt. New debt between one year and ten years is categorized as a "note," and new debt less than a year is categorized as a "bill." A bond is simply a loan, but in the form of a security.

Advantages of issuing corporate bonds

This offers some protection against variable interest rates or economic changes. Other advantages of using bonds to raise long-term finance include: not diluting the value of existing shareholdings - unlike issuing additional shares.

Bonds can be a very flexible way of raising debt capital. They can be secured or unsecured, and you can decide what priority they take over other debts. They can also offer a way of stabilising your company's finances by having substantial debts on a fixed-rate interest.

Most states issue bonds to fund specific projects, help with cash-flow planning, or for various other purposes. Like most municipal bonds, state general obligation bonds pay interest that is usually exempt from federal income taxes.

Government agencies issue bonds to finance a variety of economic or public development projects for private and public entities. When investors purchase bonds, they essentially lend money to the borrower through the issuer.