Why Do Companies Issue Bonds? (2024)

FAQs

Why Do Companies Issue Bonds? ›

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.

Companies issue bonds to finance their operations. Most companies could borrow the money from a bank, but they view this as a more restrictive and expensive alternative than selling the debt on the open market through a bond issue.

When companies want to raise capital, they can issue stocks or bonds. Bond financing is often less expensive than equity and does not entail giving up any control of the company. A company can obtain debt financing from a bank in the form of a loan, or else issue bonds to investors.

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.

In summary, companies issue bonds primarily as a way to borrow large sums of money from investors. By doing so, they can raise capital to support their business activities and projects.

Bonds do have some disadvantages: they are debt and can hurt a highly leveraged company, the corporation must pay the interest and principal when they are due, and the bondholders have a preference over shareholders upon liquidation.

There are two ways to make money on bonds: through interest payments and selling a bond for more than you paid. With most bonds, you'll get regular interest payments while you hold the bond. Most bonds have a fixed interest rate.

The people who purchase a bond receive interest payments during the bond's term (or for as long as they hold the bond) at the bond's stated interest rate. When the bond matures (the term of the bond expires), the company pays back the bondholder the bond's face value.

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.

The bond market is a wide field, with many different categories of assets. In general, you can expect a return of between 4% and 5% if you invest in this market, but it will range based on what you purchase and how long you hold those assets.

Can you lose money on bonds if held to maturity? ›

After bonds are initially issued, their worth will fluctuate like a stock's would. If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.

If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.

A bond is a loan that the bond purchaser, or bondholder, makes to the bond issuer. Governments, corporations and municipalities issue bonds when they need capital. An investor who buys a government bond is lending the government money. If an investor buys a corporate bond, the investor is lending the corporation money.

Corporate bonds are debt securities issued by a corporation in order to raise money to grow the business, pay bills, make capital improvements, make acquisitions, and for other business needs.

Companies issue bonds to borrow money from an individual or institutional investors who are known as bondholders. By purchasing a corporate bond, the holder agrees to lend the issuing company a certain amount of money for a specific period at a fixed rate of interest.

Investors buy bonds because: They provide a predictable income stream. Typically, bonds pay interest on a regular schedule, such as every six months.

Earnings per share may be higher. Bonds don't require payment of dividends. Bond prices do not fluctuate as much as stock. An advantage of issuing bonds instead of issuing common stock is that the return on common stockholders ' equity may be higher after bonds are issued.

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.

The most common explanation is to hedge interest rate risk (e.g., Pye, 1966). The argument is that once the interest rate goes down, the issuing firm can refund the bond at a lower interest rate.

A bond is a loan that the bond purchaser, or bondholder, makes to the bond issuer. Governments, corporations and municipalities issue bonds when they need capital. An investor who buys a government bond is lending the government money. If an investor buys a corporate bond, the investor is lending the corporation money.