| Bond Main
Page | Table of Contents | Corporate
Finance Course
|
Why Do Corporations Issue Bonds?
Corporations issue bonds for several reasons:
-
Provides corporations with a way to raise capital without diluting the
current shareholders' equity.
-
With bonds, corporations can often borrow at a lower interest rate than
the rate available in banks. By issuing bonds directly to the investors,
corporations can eliminate the banks as "middlemen" in the transactions.
Without the intermediaries, the borrowing process becomjes more efficient
and less expensive.
-
By issuing bonds, corporations can often borrow money for a fixed rate
for a longer term than it could at a bank. Most banks will not make fixed
rate loans for longer than five years because they fear losing money if
their cost of funds (raised by selling CDs, savings accounts, and the like)
rises to a higher rate than long-term loans. Most companies want to borrow
money for long terms and so elect to issue bonds.
-
The bond market offers a very efficient way to borrow capital. By issuing
bonds, the borrower is spared the task of undergoing numerous separate
negotiations and transactions in order to raise the capital it needs.
Instead, when corporation issues bonds, creates one master loan agreement
and offers investors a chance to participate in the loan. The company offers
the identical deal to all investors regardless of whether the individuals
interested in buying just one bond each or corporations buying 1000 bonds.
The master loan agreement between the corporation and the investors is
called a bond indenture. The indenture contains information that
you would expect in any loan agreement such as:
-
The amount of money the company is borrowing.
-
The interest rate the company will pay.
-
The collateral for the loan (if any).
-
When the company will make its interest payments.
-
Whether the company will pay off the loan, that is, when the bonds will
mature.
-
Whether the company and/or the investors will ahve the choice of shortening
the bond's original maturity.
| Bond Main
Page | Table of Contents | Corporate
Finance Course
|
This page is created by Julia
Lee '99 and is maintained by Professor
Satyananda Gabriel of the Economics Department, Mount
Holyoke College, January 1999.
|