Updated July 14, 2023
Definition of Bond Issuer
Bond Issuers are the issuing entity of the bonds which the investors purchase. Bond Issuers can be Government entities, firms, Municipalities, Special Purpose Vehicles, etc.
The bond issuers must repay the principal amount at the bond’s maturity date. The bondholders must check the bond issuers’ credit rating before investing. The bond issuer must pay the coupon amount every month or half-yearly, or maybe yearly, to the borrowers of the bond, and like any other bond, the repayment is at the maturity date.
Explanation
Bond issuers are the entities that are issuing the bonds for the investors. The bond issuers pay the required principal amount at the maturity date. The bond issuers are the entities fully owned by the government entities, the municipalities, SPVs, etc. The bonds issue to mitigate the fund’s requirement. The bond issuer pays the investor interest and repays the principal outstanding amount on the maturity date.
Example of Bond Issuers
US Treasury bond is a bond issuer that issues bonds to the public. The US Treasury bonds are also known as T Bonds. The US Treasury bonds have a maturity of 20 years or more. These bonds earn periodic interest up to the date of maturity. On reaching the maturity date, the principal amount is repaid. This is a classic example of a bond issuer.
Types of Bond Issuers
There are almost four to five types of bond issuers. These are Firms, Government entities, Municipalities, Special Purpose Vehicles, etc.
- Firms: Whenever firms require funds to finance their projects or any working capital requirement arises, they issue bonds. The issued bonds can have different credit ratings compared to the firm’s credit rating. Therefore the investors should analyze the pointers of the bond and then make the investment decision. Firms issue different classes of bonds, and thus the investor has choices to make.
- Government: Government entities also issue a bond to the public to finance their projects. The US Treasury bonds are one of the most popular government entity bonds. The rating of these bonds is very high, and thus the investors get attractive returns from these bonds. The government bonds also differ with the countries. In some developed countries, government-issued bonds are less riskier than those of developing countries. Therefore the investor should be keen enough to understand the bond policies before investing their proceeds.
- Municipalities: The Municipalities are bond issuers issuing bonds to the public. The Municipalities also act as the government in this case. The bonds are highly rated, like the bonds issued by government entities. The Municipalities get support from the government so that the municipalities can gain the faith and trust of the investors.
- Special Purpose Vehicle: Certain firms or government entities issue bonds for special purposes or projects. These bonds are special to finance certain projects, including building and repairing lands and bridges, etc.
How Bond Issuers Make Money?
The bond issuer issues the bonds to the public, and investors invest their money. The issuers are then required to pay periodic interest to the investors. The principal value is repaid at the end of the maturity period. The bond issuer can use the invested money as a loan. The bond issuer can finance the projects, and after the work is completed, the money is returned to the investors. Thus the purpose of the bond issue is completed here. Also, the bond issuers make money out of this process.
Advantages & Disadvantages of Bond Issuer
Some of the advantages and disadvantages are given below:
Advantages
- The advantage of issuing bonds to the public is that it can create capital for the issuers.
- The investors also get attractive hybrid options to invest in the bonds.
- The bond issuer can utilize the money to process their projects.
- Investors can save taxes while investing in the bond.
- The investors can also get some interest payments periodically.
- The interest payments made to the bond issuers are also deductible and have no tax implications.
- The retention of the capital is best possible in the case of issuing the bonds.
- It has also been seen that the issuance of bonds is cheaper than that of the shares. Issuing shares can add more cost, and the risk is the same as any other investment.
- The bond issuer is not required to pay higher returns to the investors than to the issuers of shares.
Disadvantages
- The bond issuers are required to pay the interest payment to the investors. Therefore it is like an obligation for the bond issuers.
- The investors of these bonds get fewer returns than the investors of the share of any company.
- The obligation to repay the principal amount is always there in the case of the bonds.
- It has also been seen that the investors’ risk is lower if they invest in the company’s debt rather than the firms’ bonds or bonds issued by government entities.
Conclusion – Bond Issuer
Bond issuers are firms, government entities, and special-purpose vehicles. They are issuing bonds in the public domain. The investor invests their money and purchases the bonds. The bond issuers require to pay interest to the investors periodically. The investor will have to be keen about his investments made. The bonds pay off fewer returns than any other investment. The bond issuer issues these bonds to finance their projects. They require bonds to raise funds that they invest in their projects. Apart from that, the bond issuers must pay back the entire principal amount on the maturity date. Investors can save their taxes in this transaction. The issuance of bonds is cheaper than the issuance of shares. Considering all the advantages and disadvantages, investors are required to check the bond policies before investing.
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