Bond issuers can sell bonds directly through an auction process or use investment banking services. The investment banker buys the bonds from the issuer and then sells them to the public.
Corporate bonds are issued by private utilities, transportation companies, industrial enterprises, or banks and finance companies. These corporate bonds can be divided into two additional categories: mortgage bonds, which are secured by the issuer's assets, and debentures, which are backed only by the issuer's credit.
Most companies try to establish a financial structure based on a combination of stocks, representing distributed ownership, and bonds, representing debt obligations. A company that raises funds by issuing bonds is said to be leveraged.
Because bondholders are paid at a set rate regardless of profits, this approach increases the potential for profit to stockholders but also increases the level of financial risk.
The U.S. government issues bonds through the Department of the Treasury. These bonds, known as government securities, are backed by the unlimited taxing power of the federal government. Federal agencies and government-sponsored enterprises also issue bonds of their own. Generally, all of these federal bonds are considered to be among the safest investments.
Municipal bonds are issued by state and local governments and other public entities, such as colleges and universities, hospitals, power authorities, resource recovery projects, toll roads, and gas and water utilities. Municipal bonds are often attractive to investors because the interest is exempt from federal income taxes and some local taxes.
There are two types of municipal bonds:
General obligation bonds and revenue bonds. Like a government security, a general obligation municipal bond is secured by the issuer's taxing power.
Revenue bonds are used to finance a particular project or enterprise. Income generated by the project provides funds to pay interest to bondholders.
The Republic exhibition (NM Prague)
Oil Creek and Allegheny River Railway
This vignette from an 1864 stock certificate of the Old Burning Springs Oil Co.of Wirt Co., West Virginia, depicts early spring-pole drilling rigs and woodenoil storage tanks and barrels.
In corporate law, a stock certificate (also known as certificate of stock or share certificate) is a legal document that certifies ownership of a specific number of stock shares (or fractions thereof) in a corporation. In large corporations, buying shares does not always lead to a stock certificate (in a case of a small number of shares purchased by a private individual, for instance).
Here we see how bond yields (interest paid) trend in cycles of about 20+ years. We also see how interest rates could stay low even as the U.S. borrows ever more prodigious sums: China and other nations have, via their central banks, bought astounding quantities of U.S. bonds. The high demand (deficit spending) has been met with equally high supply (of buyers willing to snap up U.S. bonds for a pathetically low rate of interest/yield).
From an investor's perspective, stocks offer a higher potential return if profits rise, but bonds are generally a safer investment. Stock dividends are paid out of company profits, while bond interest payments are made even if the company is losing money.
When interest rates fall, a bond issuer may choose to pay back the bond owner’s initial investment before the bond’s maturity date. They can then issue a new bond at a lower interest rate, but the original bond owner no longer receives regular interest payments. This is known as prepayment risk.
