Bond Issuers
Bonds are issued as forms of tradable debtSenior DebtSenior Debt - or a Senior Note - is money owed by a company that has first claims on the company’s cash flows. It is more secure than any other debt, such as subordinated debt (also known as junior debt), because senior debt is usually collateralized by assets, and senior debtholders are paid first.. 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 valuePar ValuePar Value is the nominal or face value of a bond, or stock, or coupon as indicated on a bond or stock certificate. It is a static value determined at the time of issuance and, unlike market value, it doesn’t fluctuate on a regular basis..
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 capitalNet Working CapitalNet Working Capital (NWC) is the difference between a company's current assets (net of cash) and current liabilities (net of debt) on its balance sheet. It is a measure of a company’s liquidity and its ability to meet short-term obligations as well as fund operations of the business. The ideal position is to. Firm bonds can range between the whole spectrum of bond ratings, as provided by the S&P ratings boardS&P - Standard and Poor'sStandard and Poor's (S&P) is a market leader in the provision of financial market analysis, particularly in the provision of benchmark and investable, 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 creditWhat is Revolving Debt - Guide and ExplanationRevolving debt is also referred to as a line of credit (LOC). A revolving debt does not have a fixed payment amount every month. The charges are based on the actual balance of the loan. The same is true for the computation of the interest rate; it is dependent on the total outstanding balance of the loan., revolving debtRevolving DebtA revolving debt (a "revolver", also sometimes known as a line of credit, or LOC) does not feature fixed monthly payments. It differs from a fixed payment or term loan that has a guaranteed balance and payment structure. Instead, the payments of revolving debt are based on the balance of credit every month., 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 equityReturn on Equity (ROE)Return on Equity (ROE) is a measure of a company’s profitability that takes a company’s annual return (net income) divided by the value of its total shareholders' equity (i.e. 12%). ROE combines the income statement and the balance sheet as the net income or profit is compared to the shareholders’ equity. under the CAPMCapital Asset Pricing Model (CAPM)The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between expected return and risk of a security. CAPM formula shows the return of a security is equal to the risk-free return plus a risk premium, based on the beta of that security.
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.
Learn more:
- Bond PricingBond PricingBond pricing is the science of calculating a bond's issue price based on the coupon, par value, yield and term to maturity. Bond pricing allows investors
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- Debt Capital MarketsDebt Capital Markets (DCM)Debt Capital Markets (DCM) groups are responsible for providing advice directly to corporate issuers on the raising of debt for acquisitions, refinancing of existing debt, or restructuring of existing debt. These teams operate in a rapidly moving environment and work closely with an advisory partner
- Bond TranchesBond TranchesBond tranches are usually portions of mortgage-backed-securities that are offered at the same time and that typically carry different risk levels, rewards, and maturities. For example, collateralized mortgage obligations (CMO) are structured with a number of tranches that mature on different dates, carry varying levels of risk, and pay different interest rates.
