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.
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.
