If bonds are loans between issuers (borrower) and managers (lenders), how are we as individuals able to invest in them?

323 views

Are issuers selling a portion of their borrowed money to the public as bonds? If so, how does a public price increase for a bond happen? Also how do issuers make profit off of their publicly sold bonds?

In: 2

4 Answers

Anonymous 0 Comments

The managers aren’t buying bonds with their own money, they are buying them with the money of “us”, the investors. That is what the managers are managing, they manage other people’s investment money.

Anonymous 0 Comments

When someone writes a loan it’s just a contract between the person giving the money (the bond buyer) and the person borrowing the money (the bond issuer). It’s the reverse if a car loan. You are asking to borrow money and in a sense you’re issuing a bond at a stated interest rate that the bond buyer can then resell on a secondary market should they wish to.

Anonymous 0 Comments

A government entity or company wants to borrow money by issuing bonds. As a public investor, you’re buying a portion of the loan. Say city wants to issue $20m in bonds to pay for a new school. The bankers they work with look sell those bonds by attracting many investors to the issue. There may be minimum amounts and set increments, ie. at least $1000 and buy in $1000 increments. So there would effectively be 20,000 “shares” of the bond that could be bought by investors.

Prices for bonds on the secondary market shift as overall interest rates shift. If municipals bonds were paying 4% but now the going rate is 5%, to get somebody to buy a 4% bond, you’d have to drop the price until the effective rate at the new price is 5%. Conversely, if interest rates fall, then the price of the bond will rise until the rate equals the prevailing interest rates.

Issuers make a profit by holding some of the issue themselves, as well as charging fees to the borrower and commissions to the bond buyers.

Anonymous 0 Comments

In a modern bond offering, the actual entity that pays the company the money they’re borrowing is called the *underwriter*. The underwriting company negotiates the initial interest rate of the bond offering, i.e. the payment structure the company will have to manage over the maturity of the bond for the bondholders. They give the money (less fees) to the borrower, then sell the bond on the open market. The underwriter takes risk in this operation, but generally make a profit on the IPO.

Once the bond is in the open market, it can be bought, sold, or used as collateral just like any other security. A bond holder buys (to hold) the security because they think the bond will be paid in full, and they will receive the expected income over the maturity of the bond. A bond trader speculates on the floating interest rate expected to be received by the fixed income, buying the bond if income is relatively high to the price of the security, or selling if the price of income is relatively low to the price of the security.

Bond are highly standardized contracts in the modern world, so underwriters need to follow strict regulations about the nature of the contract if they are to bring them to market. A bond that is not defined according to the standards of the marketplace won’t make it to market. I.e. a contract that gives the borrower the right to default without recourse for the bondholder isn’t marketable. The underwriters carry the liability here, as they’re the ones selling the security.

There may be examples of a company going direct to market with a bond offering (no underwriter), but not in U.S. history as far as I’m aware.