Businesses raise capital through the use of either debt or equity. Organizations use equity to obtain capital by issuing stock in the company. Organizations use debt to obtain capital either by obtaining loans or by issuing bonds. Bonds are debt securities. Debt securities have advantages to the organization raising capital and to the investor purchasing the debt.
Risk
Investing in debt securities generally has less risk than investing in equity securities. Bonds fluctuate less in the market. Bond values vary with interest rates, but they have a known value at their maturity dates. Risks in bonds include that the issuing entity may become insolvent and unable to meet its obligations, that the bond may change in value due to interest rate changes, or in some cases, that the bond may be called prior to maturity. In the event a corporation goes bankrupt, bondholders must receive their funds back before any funds can be given to stockholders.
Predictability
Bonds pay interest at a set rate. Corporate bonds typically pay interest semi-annually. Investors will receive the face value of the bond from the corporation when the bond matures. Investors know in advance what they can expect to receive.
Returns
Bond yields are generally higher than the interest you could get at the bank through savings accounts or CDs. Investors benefit from higher interest rates, as their investments grow at a greater rate.
Types
There are many types of bonds. In addition to bonds issued by corporations, there are also bonds issued by the Federal Government, states and municipalities. Bonds issued by the U.S. Government are considered to be very low-risk investments. Lower-risk bonds tend to have lower yields; higher-risk bonds tend to have higher yields--but with less assurance that you will actually receive the funds.
References
- National Federation of Independent Businesses: Equity Financing: Which is the best way for your Business to Access Capital?
- Federal Reserve Bank of San Francisco. "What Makes Treasury Bill Rates Rise and Fall? What Effect Does the Economy Have on T-Bill Rates?" Accessed April 23, 2020.
- TreasuryDirect. "Treasury Notes In Depth." Accessed April 23, 2020.
- TreasuryDirect. "Treasury Inflation-Protected Securities (TIPS)." Accessed April 23, 2020.
- U.S. Securities and Exchange Commission. "Municipal Bonds." Accessed April 23, 2020.
- U.S. Securities and Exchange Commission. "Corporate Bonds." Accessed April 23, 2020.
- U.S. Securities and Exchange Commission. "What Are High-Yield Corporate Bonds?" Accessed April 23, 2020.
- California State Treasurer. "Bond Concepts and Overview," Page 8. Accessed April 23, 2020.
- TreasuryDirect. "TreasuryDirect." Accessed April 23, 2020.
- U.S Securities and Exchange Commission. "Bonds." Accessed April 23, 2020.
- PIMCO. "Everything You Need to Know About Bonds." Accessed April 23, 2020.
- The Vanguard Group. "What Is a Bond? A Way to Get Income & Stability." Accessed April 23, 2020.
- Ally Bank. "Bond Mutual Funds." Accessed April 23, 2020.
- U.S. Securities and Exchange Commission. "Risk and Return." Accessed April 23, 2020.
- Standard & Poor's Financial Services. "S&P Global Ratings Definitions." Accessed April 23, 2020.
- Fidelity. "Bond Ratings." Accessed April 28, 2020.
- U.S. Securities and Exchange Commission. "Investor Bulletin Interest Rate Risk—When Interest Rates Go up, Prices of Fixed-Rate Bonds Fall," Pages 1-3. Accessed April 23, 2020.
- BlackRock. "How to Invest in Bonds." Accessed April 23, 2020.
- Fidelity Investments. "What Is a Yield Curve?" Accessed April 23, 2020.
- Financial Industry Regulatory Authority. "Bonds and Interest Rates." Accessed April 23, 2020.
- Rocket Mortgage. "How Bonds Affect Mortgage Rates." Accessed April 23, 2020
Writer Bio
Based in upstate New York, Peter Neeves began writing for Demand Studios in 2009, and has a background writing corporate training materials. Neeves attained his Master of Business Administration from IONA College, where he received the Joseph G. McKenna award for academic excellence. He is currently pursuing a Ph.D. at Walden University.