Why are bonds important?
When companies need to raise money, issuing bonds is one way to do it.
- A bond functions like a loan between an investor and a corporation. The investor agrees to give the corporation a specific amount of money for a specific period of time in exchange for periodic interest payments at designated intervals.
When the loan reaches its maturity date, the investor’s loan is repaid.
The decision to issue bonds instead of selecting other methods of raising money can be driven by many factors. Comparing the features and benefits of bonds versus other common methods of raising cash provides some insight into why companies often look to bond issuance when they need to raise cash to fund corporate activities.
Issuing bonds also gives companies significantly greater freedom to operate as they see fit free from the restrictions that are often attached to bank loans. Consider, for example, that lenders often require companies to agree to a variety of limitations, such as not issuing more debt or not making corporate acquisitions, until their loans are repaid in full. Such restrictions can hamper a company’s ability to do business and limit its operational options.
Issuing bonds enables companies to raise money with no such strings attached.
Bond issuance enables corporations to attract a large number of lenders in an efficient manner. Record keeping is simple, because all bondholders get the exact same deal with the same interest rate and maturity date. Companies also benefit from flexibility in the significant variety of bond offerings available to them.
The types of bonds are:
- Callable bonds
- Convertible bonds
These are the type of bonds most business owners use for their businesses.