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:
- 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.
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.