Question

Describe bond financing and discuss how bond financing may be advantageous to standard bank loans.

Answer 1

In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. ... The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date.

Advantages of Bonds

Bonds offer safety of principal and periodic interest income, which is the product of the stated interest rate or coupon rate and the principal or face value of the bond. Bonds are ideal investments for retirees who depend on the interest income for their living expenses and who cannot afford to lose any of their savings. Bond prices sometimes benefit from safe-haven buying, which occurs when investors move funds from volatile stock markets to the relative safety of bonds.

Governments and businesses issue bonds to raise funds from investors. Bonds pay regular interest, and bond investors get the principal back on maturity. Credit-rating agencies rate bonds based on creditworthiness. Low-rated bonds must pay higher interest rates to compensate investors for taking on the higher risk. Corporate bonds are usually riskier than government bonds. U.S. Treasury bonds are considered risk-free investments.

Bonds tend to be less volatile and less risky than stocks, and when held to maturity can offer more stable and consistent returns. Interest rates on bonds often tend to be higher than savings rates at banks, on CDs, or in money market accounts.