What Does Issuing Bonds Mean?
- Bonds are usually offered by companies, corporations, state or federal governments, or other institutions. Investors choose to purchase the bonds. However, the money the investors give to the bond issuer needs to be repaid. Most bonds also specify periodic payment of interest to the bondholder, so the bond really acts like a long-term loan from the bondholder to the issuer. Accounting rules generally require a company to carry bonds as debt, rather than equity, on its balance sheet. Unlike many loans, most bonds can be easily transferred after issuance. Therefore, the law considers most bonds to be tradable securities, subject to federal and state securities laws.
- The exact terms and rules governing a specific bond are usually spelled out on the bond itself. Bonds typically last for a fixed period of time, at the end of which they reach "maturity." Once a bond matures, the issuer must repay the entire principal amount of the bond to the bondholder. The bond will spell out its own maturity date and interest payment rate, as well as any special rules that apply to ownership or repayment of the bond.
- If a company gets into financial trouble, or, for other reasons, decides to liquidate before the maturity date on the bonds, there may be limited funds available to repay bondholders, shareholders, creditors and other parties to whom the company owes money. In liquidation, the law requires a company to repay its creditors before its stockholders. Since bonds are considered debt, the company's bondholders will have the right to repayment before any of the shareholders. Depending on circumstances, bondholders may have to wait for repayment until some other creditors are satisfied, such as lienholders or those who performed services for the company.
- There are myriad different types of specialized bonds, each with its own rules. However, all bonds generally adhere to the traits above, with one exception -- zero coupon bonds. These bonds differ from other bonds in that they carry no fixed interest payments. Rather, the company sells the bond at a discounted issuing price, and the investor gets repaid at maturity when the company repays the bond at the full price.