The question is, why might a town decide to issue bonds?
The answer to the question can be given in three or four lines. But in order to understand the answer, it is really crucial first to understand what a bond is.
Once we will get the proper idea about the definition of bonds, it will be much easier to figure out the answer to our primary question. You may also be able to find out the answer by your known. But do not worry, I will answer your question, “Why might a town decide to issue bonds?”
What Is A Bond?
A bond is a secured debt that is issued by either the government or any corporate body. It is owed to the holders by the issues. The two most popular types of bonds are,
1. Munis or Municipal bonds, issued by the government
2. Corporate bonds, issued by any business or corporate bodies. A bond can be in mutual funds or in private investing. Here a person gives a loan to the government or to a company.
The bond is nothing but a secured debt, as I have told you earlier. Under this, the issuer owes a debt to the holders, and the issuer is obliged to pay the interest on the basis on the basis of the terms of the bond.
Or the issues also can pay back the capital along with the interests on a certain date. This date is termed the maturity date. These interests are payable at some fixed intervals, which can be annual, semiannual, or sometimes monthly.
A bond is also can be negotiable, which is very often. When I an saying bond is negotiable, it means the ownership of the instrument also can be transferred in the secondary market.
So, once at the bank, the transfer agent medallion stamp the bond; on the market, it is highly liquid.
The Features Of Bonds
Now, as you get an idea about what a bond is, let’s dig a little deeper and know the features of a bond.
Principal, Nominal, par, or face amount is the particular amount on which the issuer needs to pay the interest, and most commonly, this amount also needs to be paid back at the end of the term.
There are also some structured bonds, also may have a redemption amount that is different from the face amount. And this can be linked to the particular asset’s performance.
On the maturity date, the issuer is obliged to pay back the nominal amount. In case all the due payments are made after the maturity date, the issuer further has no obligations to the holder of the bond.
The time length until the maturity date is mostly referred to as the tenor, or term, or maturity of any bond. And the maturity can be of any length. Most bonds have a term that is shorter than 30 years.
The United States Treasury securities market has four categories of bond maturities. And they are:
- Short Term or Bills: The maturity lies between zero to one year.
- Medium Term or Notes: The maturity lies between one to ten years.
- Long Term or Bonds: The maturity lies between ten to thirty years.
- Perpetual: It has simply no maturity period.
The interest rate that the issuer needs to pay the holder is termed coupon. When it is a fixed rate bond, the coupon remains fixed throughout the whole life of the particular bond. But the scenario is totally opposite for floating-rate notes.
On the basis of the money market reference rate movement, the coupon varies throughout the entire life of the particular bond.
Historically, to the paper bond certificates, coupons are physically attached. And each coupon represents an interest payment. The bondholder needs to hand in the same coupon to the bank in return for the interest payment on the very interest due date.
But in recent days, interest payments are mostly made electronically. And the interest also can be paid at different frequencies, generally semiannual, i.e, 6 months or annual.
The rate of return that is received from investing in the bond is referred to as yield. By saying yield, I am referring to two different aspects. They are,
- The current or running yield. Divide the annual interest payment by the bond’s current market price, and you will get the running or current yield. It is also often called clean price.
- The redemption yield or yield to maturity. Consider an investor who buys any bond at the given market price rate, on schedule, receives all interest along with the principal, and also holds the bond to maturity. Now the internal rate of return that the investor earned is called redemption yield.
Types Of Bonds
Now we will discuss the different kinds of bonds. Let’s have a look at the different types of bonds.
1. Fixed-rate bonds.
2. Floating rate notes.
3. Zero-coupon bonds.
4. High-yield bonds.
5. Exchangeable bonds.
6. Convertible bonds.
7. Inflation-indexed bonds.
8. Equity-linked notes.
9. Asset-backed securities.
10. Covered bonds.
11. Subordinated bonds.
12. Perpetual bonds.
14. Bearer bonds.
15. Registered bonds.
16. Government bonds.
17. Supranational bonds.
18. Municipal bonds.
19. Book-entry bonds.
20. Lottery bonds.
21. Serial bonds.
22. War bonds.
23. Revenue bonds.
24. Dual currency bonds.
25. Climate bonds.
26. Retail bonds. Social impact bonds.
Why Might A-Town Decide To Issue Bonds?
From the above discussion, after you get some knowledge about the bond, its features, and different types of bonds, you may have got the answer to your question, “why might a town decide to issue bonds?” a bond will allow you to get the capital money along with some interest rate after the maturity. This is a way the issuer, government, or corporation get rid of their debt.
So, next time when you are going for investing your money in bonds, make sure you have done your homework or research properly. You can choose any of the different types of bonds. As I have given you a wide range of options to choose from. Plenty of research and all the basic knowledge that is provided here will be enough not to lose your money and taking the right investment decision.