Benefits of Issuing Bonds
Bonds are similar to bank loans in that they are a kind of debt financing for companies. Different from bank debts, bonds are basically marketable securities since they can be traded. Corporations sell their bonds to retail and institutional investors and get various advantages. Most of the benefits of issuing bonds are explained below.
1. Liquidity benefit
Bonds that are issued to the public should be registered fully with SEC. These bonds are usually issued in denominations of $1,000. Most investors prefer buying bonds as they are aware that they can easily sell them any time they want. Similarly, institutions also like buying bonds that they can resell later on when the need arises.
2. Increased control
Bonds are regarded as senior securities during reorganization or liquidation since senior or major bondholders have control of the company. A major holder of bonds may, under specific circumstances, gain full control of the company. However, the public normally purchases bonds in smaller denominations and thus their ownership or control is spread amongst many holders.
3. Improved terms
When an organization borrows resources from a certain bank, the lender usually dictates the loan terms. Nevertheless, when issuing bonds to the public, the situation is completely different as the organization borrows resources on its own terms. This is done through disclosing of the term in the organization’s prospectus.
4. Raise capital
During the issuing of bonds, most of the bonds are sold to huge institutional investors like insurance companies, pension funds and endowments. Retail investors may also purchase the bonds and usually their collective power is substantial. This allows the issuer to increase their capital.
Issuing bonds does have its demerits also. In fact, firms that issue bonds have high takeover potential. In an effort of securing a firm’s future, the original owners of the firm might lose their firm altogether.