Bonds are fixed-income securities. Bond issuers come from companies, governments, and supranational institutions. They offer regular income to lenders.
Investors are lenders to bond issuers. When you buy corporate bonds, you are lending money to the company. Regularly, maybe quarterly or half a year, you receive coupon payments. And, at the maturity date of the bond, you will receive the principal.
Types of bond issuers
In general, bond issuers come from:
- Supranational Institutions
- National or sovereign government
- Regional government
Corporate bond issuers may be financial institutions such as banks or non-financial institutions such as manufactures. They issue bonds for several purposes, for example, to finance projects or working capital.
Issuing bonds is an alternative to issuing shares. However, unlike stocks, bonds increase the company’s leverage because it is a liability. The higher the financial leverage, the greater the chance for the company to default. High leverage indicates that the company bears a large debt and coupon payment burden, relative to cash inflows from operations. The situation ultimately limits companies to borrow more because of the high risk level of default.
Corporate bonds is usually considered to be riskier than government bonds. Therefore, corporate bonds offer higher yields. Corporate revenue is considered more uncertain than tax revenue by the government. However, this assumption does not always apply to all cases.
National government bonds
Another term for this bond is a sovereign bond. Sometimes, we also call it government debt. However, the terms bonds and debts are slightly different. Bonds generally only cover those with a longer maturity. In contrast, debts include short-term (bills), medium-term (notes), and long-term (bonds). Meanwhile, in Indonesia, debt securities only comprise short-term, i.e. Surat Perbendaharaan Negara (SPN) with a tenor of less than one year and government bonds with a tenor of more than one year.
Government bonds usually have a higher rating than corporate bonds. That shows that state bonds are less risky than corporate bonds. But, again, that’s not always. Occasionally, institutions place a higher corporate bond rating than a sovereign rating.
Furthermore, the ranking of government bonds varies between countries. Bonds issued by developing country governments will naturally be riskier and get a lower rating than bonds issued by developed countries. Some developed countries with the highest rating (AAA) from S&P are Singapore, Australia, Canada, Germany, Norway, Sweden, Luxembourg, Netherlands, and Switzerland. Meanwhile, the United States, United Kingdom, and France are each rated AA +, AA, and AA. Meanwhile, Indonesia received a BBB rating from S&P.
Supranational organizations refer to global entities that are not based in certain countries. They have members in many countries. Examples of supranational bodies that issue bonds are the World Bank, the International Monetary Fund, or the European Investment Bank. Take the World Bank as example, it has issued more than USD13 billion in green bonds in 20 currencies since 2008. The bonds have been rated AAA.
Supranational organizations issue bonds to fund operations and pay coupon payments through operating income.
Like sovereign bonds, supranational bonds usually have excellent ratings.
Local government bonds
Local governments, such as provinces and municipalities, also issue bonds. They are known as municipal bonds. Funds from the issuance of bonds are generally to finance public projects such as roads, airports and ports, schools, and infrastructure-related improvements. The issuance usually receives full support from the central government.
In United States, for example, the market size of the municipal debt market reached USD3.7 trillion as of November 7, 2019. That figure jumped from USD361 billion in 1981. One of the main advantages of municipal bonds in the United States is that interest payments are exempt from taxes.