Why do Corporations Issue Bonds?

Why Issue Corporate Bonds?


Most companies have some sort of bonds where they allow investors to purchase corporate bonds with a fixed rate of return.  This allows the companies to create their own financing without affecting shareholders or going to banking institutions for the money.

Why Not Offer More Shares?


Some companies will issue more shares, but depending on the quality of the income statement, most financial analyst will quickly point out if the offering is under direst.  This will scare potential investors from purchasing any shares.  Also, by issuing additional shares, it will dilute the value of existing shares in the marketplace if their is not enough demand for the stock.

Why Not Banks?


Banks will gladly offer profitable companies more money or lines of credit, but the problem is that it will be at a higher interest rate than if the company simply went to investors directly.  This is because the bank will not only need to make a return, but will pad the rate even more to take in account for the additional risks.  Lastly, investors will purchase corporate bonds with a time horizon of 5 - 10 years.  Banks are unwilling to agree to such lengthy loan periods, because as the length of a loan stretches out, the risks associated with the loan increases.  This often makes it difficult for banks to offer loans at competitive rates to companies.

Benefits of Corporate Bonds


By a company issuing bonds, it is almost like a person placing all of their debts on one low fixed rate credit line for an extended period of time.  This allows the company to operate stress free with a long-term expectation of any cash outlays required to maintain their level of financing.  Most companies enter into financial trouble as a result of variable interest rates or credit drying up.  By issuing corporate bonds, the company allows itself to stay afloat without taking on debt that may become too hard to manage at a later date.
Tim Ord
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Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

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