Question

What are bonds? What is the process for issuing bonds? How are they traded? Why are bonds used instead of just borrowing money from a bank? Why would a company issue bonds instead of stock to raise money?

Answer 1

In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include municipal bonds and corporate bonds. Bonds can be in mutual funds or can be in private investing where a person would give a loan to a company or the government.

Process:

1. Approach to the operation. First, the company talks to the bank and explains its need for financing. ...
2. Rating analysis and documentation preparation. ...
3. - Presentations to investors, the 'roadshow' ...
4. - The bond is placed on the market. ...
5. - Allocation process and bond pricing.

Once you select a bond through your investment representative or online through a broker, you place a trade. The date you place the trade becomes the trade date, and determines the settlement date. Most corporate bonds settle three days after trade date, known as T+3. U.S. Treasury bonds settle the day after trade, (T+1), while asset-backed bonds like Fannie Mae may settle several days later. On settlement date, your broker will wire money to the seller on your behalf and you will receive shares of the bond in return.

Issuing bonds can help in enhancing the returns to shareholders as interest paid on bonds are lower than the interest rates paid on bank loans. Lower interest payments translates into higher net profits, as a result of this, shareholders enjoy higher earnings per share.

Issuing bonds can help in enhancing the returns to shareholders as interest paid on bonds are lower than the interest rates paid on bank loans. Lower interest payments translates into higher net profits, as a result of this, shareholders enjoy higher earnings per share.