Bond Issuers

Bond Issuers Meaning

Bond Issuers are the entities that raise and borrow money, from the people who purchase the bonds (Bondholders), with the promise of paying periodic interest and repayment of the principal amount upon maturity of the bonds.

Explanation

An entity needing money can borrow the same by issuing bonds, which are purchased by bondholders. 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, and upon maturity, the issuer returns the principal amount borrowed to the holder of the bond.

Features

The following are a few of the features of Bond Issuers:

Features-of-Bond-Issuers.jpg

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  1. Entity: They can be non-individual entities only, i.e., bonds can’t be issued by an individual.
  2. The requirement of Money: Bond Issuer’s issue bonds when they are in requirement of funds for a variety of reasons ranging from daily operational needs to need for funding expansion for growth of the business, etc.
  3. Contractual Promise for Payment: They enter into a contract by way of issue of bonds whereby they are liable to pay periodic interest to bondholders and to repay the principal loan amountPrincipal Loan AmountLoan Principal Amount refers to the amount of money loaned by the lender to the borrower. Furthermore, it is the amount on which the lender charges the borrower interest for fund utilization.read more upon maturity of the bond.
  4. Rating: In order to issue a bond, Bond issuers are recommended, if not required, to get a credit rating from a credit rating agency. The rating tells about the creditworthiness of the issuer, i.e., its ability to pay the interest and principal. For example, the rating of a developed country like the US would be higher than any developing country like Thailand, implying that the bonds issued by the US would be relatively less risky than those issued by Thailand.

Types of Bond Issuers

Types-of-bond-Issuer

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#1 – Corporations

Corporations are one of the largest categories of Bond Issuers. Both private and public corporations issue bonds to raise money for a variety of reasons. These may range from funding their day to day operations to expanding their existing businesses. Corporations include financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more, public sector undertakings, and other private companies.

For example, Microsoft, Apple, Facebook might issue bonds to finance their needs. Here these three entities are the bond issuers.

#2 – Governments

The government of a nation issues bonds in order to fund their various welfare measures or for other investment purposes. Government is generally considered relatively less risky than corporate issuers. They usually pay out interest on bonds and repay the principal from their revenue, such as taxes.

For example, the US government issues treasury bonds with borrowing money. These bonds are backed by the full support of the government.

#3 – Supranational and Multilateral Entities

These are entities that are not based in a particular nation. It includes entities like World Bank, International Monetary Fund (IMF), etc. These issuers are also highly rated and less risky because of their global standing.

World Bank issues somewhere between US$50-US$60 billion annually to support the financing of programs that support the Sustainable Development Goals.

Examples of Bond Issuers

Bond Issuers

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For example, ABC Ltd. is considering raising certain money by issuing bonds to fund its upcoming project. It issues 5-year bonds of ₹500 crores to the investors, agreeing to pay 9% interest semi-annually to the bondholders. Upon the completion of 5 years, it will repay the amount borrowed along with interest.

Here, ABC Ltd. is the Bond Issuer.

Few recent examples of Corporate Bond Issuers are:

  • A US-based airplane manufacturer, Boeing, has recently issued bonds and raised money to the tune of US$25 billion in the month of April 2020.
  • Indian conglomerate Reliance Industries Ltd. raised ₹8,500 crores in three-year bonds in April 2020.

Advantages

Disadvantages

Conclusion

Bond Issuers play an important role in the capital markets, helping the inefficient allocation of capital by raising money from the investors. Issuers get the desired money for carrying out their projects or daily activities, and bondholders also get a decent return on their excess capital. Issuers play that link between the excess capital with the investors and the investment project, which requires funds for their usage.

Recommended Articles

This has been a guide to Bond Issuers and its meaning. Here we discuss features, types, and examples of bond issuers along with advantages and disadvantages. You may learn more about financing from the following articles –