Bond financing is borrowing for a specific tenure. Bonds are issued with the purpose of raising money. Potential investors buy bonds and there is a particular mature value or face value of these bonds. Many bonds are issued through the process of underwriting.
During the process of underwriting, one or many banks, create a syndicate and buy an entire issue of the bond from an issuer. Then the bonds are again resold to the investors.Bond financing is a loan in the form of security. While financing a bond, a bond issuer is basically the borrower as it borrows money from the market.
Bonds are debt instruments and bond financing is done by a large number of issuers across the globe. There are certain strict regulations to financing bonds.
Bond issuers can be categorized into categories as follows:
Issue supernational bonds by agencies like European Investment Bank.
Often governments issue bonds in their own currency of transaction. Governments also issue sovereign bonds in foreign currencies.
Sub-sovereign, provincial, state or local authorities or local municipalities:
Across United States bonds issued by state and local governments are called Municipal bonds.
Government sponsored entities:
Different government sponsored entities follow the path of bond financing.
Corporate bonds or bonds issued by companies:
Bond financing by different companies.
Special purpose vehicles :
There are companies established with an aim of accumulating asset backed securities.
While bond financing,the issuing authority specifies about the following:
Principal amount or face amount:
The amount invested by an investor in a particular bond.
The price at which the bond is offered.
The date in which the issuer repays the specified maturity amount.
Coupon and coupon dates:
Coupon resembles the interest rate and coupon date is the date when the issuer provide interest to the investor.
Rate of interest:
Bonds can be of fixed and floating rates of interest.
Covenants or indenture:
Documents that highlight rights of the bondholders.
Several types of bond financing have attained overwhelming success. The number of bondholders grows daily across the globe.
Last Updated on : 10th July 2013