Meet the various types of issuers
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Bonds are issued as forms of tradable debt. The bond issuer is the borrower, while the bondholder or purchaser is the lender. At the maturity of the bond, bond issuers repay the bondholder the principal value.
There are many types of bond issuers:
- Firms
- Governments
- Supranational Entities
- Regions and Municipalities
- Projects and SPVs
Bond Issuers: Firms
The most common type of bonds are issued by firms. Firms issue bonds when they require funds to finance projects or working capital. Firm bonds can range between the whole spectrum of bond ratings, as provided by the S&P ratings board, for example.
Firms may even issue different classes of bonds, with differing bond characteristics. Accordingly, a firm with a specific credit rating may have bond issues that are not necessarily in line with that credit rating. For example, Hershey’s may issue bonds that are AA rated, even if the company itself is wholly rated as an AAA company.
Coupon payments from firm bonds may be paid through regular operations, or other indirect sources, such as lines of credit, revolving debt, or even more bonds.
Bond Issuers: Governments
The second most common type of bonds are issued by governments. The US Treasury Bond is a great example of this type of bond issuer. Government bond ratings are typically very high, although this can depend on the specific government issuing the bond. A bond issued by a developing country’s government will naturally be riskier and lower rated than a bond issued by a developed country.
The US Treasury Bond is a very highly rated bond, such that the yields on these bonds are often taken as the risk-free rate when performing financial calculations, such as calculating the cost of equity under the CAPM.
Coupon payments for government bonds are typically paid out from government revenue, such as taxes.
Bond Issuers: Supranational Entities
Supranational entities refer to global entities that are not based in a specific nation. More specifically, a supranational entity has members that exist in multiple countries. Examples of supranational entities that issue bonds are the World Bank or the European Investment Bank. Like government bonds, these bonds are typically quite highly rated.
A supranational entity may issue bonds to fund its operations, and pay out coupon payments through operational revenue.
Bond Issuers: Regions and Municipalities
Smaller municipalities may issue bonds in a similar matter to governments. These bonds will usually be rated similarly to the over-encompassing government. While the bonds themselves are not issued by the government, they are typically backed by the full faith of that government.
Bond Issuers: Special Projects and SPVs
Firms or governments may issue bonds for special projects or through special purpose vehicles. These bonds are tied to a specific project, such as an infrastructure build. The bond proceeds are then used to finance that project, and the coupon payments and principal are paid out through the project’s revenue.
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FAQs
Bond Issuers
- Firms.
- Governments.
- Supranational Entities.
- Regions and Municipalities.
- Projects and SPVs.
There are two major types of issuers: governments and corporations. Depending on market conditions and issuer-specific financing needs, corporations will issue debt when it is favorable compared to equity-financing or other funding alternatives.
What is the role of the bond issuer? ›
Issuer. The most important participant in a bond issue is the municipal issuer of the bonds. The issuer undertakes the financing to fund capital projects or to refund existing debt. All other participants assist the issuer in raising the money.
Who are the bondholders and bond issuers? ›
Technically, a bond issuer is a borrower, and the bondholder is the lender of the money. Till the maturity of the bond, the bond issuer pays periodic (can be annual/ semi-annual) interest to the bondholders. Upon maturity, the issuer returns the principal amount borrowed to the bondholder.
How do issuers make money on bonds? ›
Issuing bonds is one way for companies to raise money. A bond functions as a loan between an investor and a corporation. The investor agrees to give the corporation a certain amount of money for a specific period of time. In exchange, the investor receives periodic interest payments.
Who is the issuer of the US Treasury bonds? ›
In the United States, federal bonds are issued by the Department of the Treasury. There must be a legal document that outlines the conditions under which the bond issue can be undertaken. U.S. government bonds are generally sold at auctions.
Who typically issues bonds? ›
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.
Can I lose any money by investing in bonds? ›
You can lose money on a bond if you sell it for less than you paid or the issuer defaults on their payments. When you buy or sell a bond, the commission is built into its price. The investment firm marks up the price of the bond slightly to cover the costs of selling the bond.
Does the Fed buy bonds? ›
The Fed increases the money supply in the economy by swapping out bonds in exchange for cash to the general public when it buys bonds in the open market. It decreases the money supply by removing cash from the economy in exchange for bonds when it sells bonds. OMO therefore has a direct effect on money supply.
What is the risk of a bond issuer? ›
Call risk is the likelihood that a bond's term will be cut short by the issuer if interest rates fall. Default risk is the chance that the issuer will be unable to meet its financial obligations. Inflation risk is the possibility that inflation will erode the value of a fixed-price bond issue.
Disadvantages of Issuing a Bond Program:
- Higher borrowing costs: Unfortunately, bond issuances may come with higher borrowing costs compared to bank loans. ...
- Market conditions and investor demands: Bond issuances are subject to market conditions and investor demands.
Extraordinary redemptions allow the issuer to call its bonds in the event of certain specified—and as its name suggests, extraordinary—events, such as damage to the assets collateralizing the debt or the failure of a project the debt was issued to finance. These events are spelled out in the bond's offering statement.
Who are the most common issuers of bonds? ›
Issuers sell bonds or other debt instruments to raise money; most bond issuers are governments, banks, or corporate entities. Underwriters are investment banks and other firms that help issuers sell bonds. Bond purchasers are the corporations, governments, and individuals buying the debt that is being issued.
What does YTM mean in bonds? ›
Yield to maturity (YTM) is the overall interest rate earned by an investor who buys a bond at the market price and holds it until maturity.
How do bonds generate income for investors? ›
In return for buying the bonds, the investor – or bondholder– receives periodic interest payments known as coupons. The coupon payments, which may be made quarterly, twice yearly or annually, are expected to provide regular, predictable income to the investor..
What companies are issuing bonds? ›
New Corporate Syndicate Offering
| Company | Prospectus (Effective Date) |
|---|
| American Honda Finance Corp | Prospectus (09-10-20) |
| Bank of America Corp | Prospectus (06-29-18) |
| Bank of Montreal | Prospectus (04-20-20) |
| Bank of Nova Scotia | |
4 more rowsAn issuer is said to be a legal entity that develops, registers, and sells securities to raise funds for its operations. Issuers can be corporations, investment trusts, or domestic/foreign governments.
What are the four types of bonds issued by a bank? ›
Bonds are investment loans that pay interest. Corporate bonds, municipal bonds, U.S. government bonds and international market bonds are four of the most common types. The cost and barriers to investing vary across the types of bonds.
Who generally issued bonds? ›
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.
