What Is Bond Issuance?
Bond issuance is the process of creating and selling debt instruments to the public. When a company, government, or other entity issues a bond, it enters into a contract with bond holders, in which the issuer promises to pay a specified amount of money periodically and to repay the principal amount of the bond at a predetermined date in the future. The principal amount and periodic payments made by the issuer, otherwise known as the coupon, are usually determined by historical market yields and the issuing entity’s creditworthiness.
Bonds are typically offered in either public or private offerings. Public offerings are registered with the U.S. Securities and Exchange Commission (SEC) and are subject to the SEC’s reporting requirements. Private offerings, on the other hand, are unregistered and generally directed only to a select group of investors.
Types of Bonds
Bonds can be classified according to a number of different criteria, such as their maturity date, the issuer’s credit rating, their tax treatment, and their risk profile. The common types of bonds include:
Government Bonds: These are bonds issued by the federal, state, or local governments. Treasury notes, Treasury bonds, and Treasury inflation-protected securities (TIPS) are examples of government bonds.
Corporate Bonds: These are bonds issued by corporations in order to raise capital. Corporate bonds are typically rated by nationally recognized statistical rating organizations (NRSRO) such as Moody’s and Standard & Poor’s.
Treasury Bills: These are short-term debt obligations that are issued with a maturity of one year or less. Treasury bills are issued by the government and can be purchased directly from the U.S. Treasury.
Municipal Bonds: These are bonds issued by states, cities, or other local governments. The income received from municipal bonds is generally exempt from federal taxes, although it may be subject to state or local taxes.
Bond Ratings
Bond ratings are issued by nationally recognized statistical rating organizations (NRSRO) to provide investors with an indication of the issuer’s creditworthiness. Ratings range from Aaa (the highest rating) to C (the lowest rating). Investment grade bonds are those with ratings of Aaa to Baa, while those with ratings of Ba and below are considered to be non-investment grade bonds.
Benefits of Bond Issuance
Bond issuance provides the issuing company with several benefits, including:
Access to additional capital: Bonds can provide companies with additional capital to finance expansion, refinance existing debts, or purchase assets.
Lower cost of financing: By issuing bonds, companies are able to raise money from a larger pool of investors than when issuing stocks. This can help to ensure a lower cost of financing for the company.
Liquidity: Bonds allow companies to raise funds relatively quickly and in large quantities if needed.
Risks of Bond Issuance
Bond issuance entails certain risks, including:
Interest rate risk: If interest rates rise, the value of the bonds may decline, reducing the amount of money that can be raised from the bond issuance.
Default risk: If the issuer fails to make coupon payments or repay the principal when due, bond holders may suffer a loss on their investments.
Inflation risk: Inflation can erode the value of the coupon payments, reducing the return that investors receive.
Conclusion
Bond issuance is a way for companies, governments, and other entities to raise capital, but it also entails certain risks. Investors should understand all of the risks involved before investing in bonds. They should also make sure that the bonds they are buying are issued by a creditworthy issuer. Additionally, investors should consider all of the potential benefits and risks before investing in any type of bond.
