Governments, corporations and other entities access debt capital markets to fund their operations
Issuers raise funds by offering bonds and other debt instruments in the debt capital markets to fund existing operations or invest in new projects. There are two major types of issuers: governments and corporations. Depending on market conditions and issuer-specific financing needs, corporations will issue debt when it is favorable compared to equity-financing or other funding alternatives.
Corporations utilize debt securities to raise capital and fund their capital expenditures. Holders of common stocks are “owners” who participate in the upside growth of the company. Holders of corporate bonds, on the other hand, do not share these profits – they can only expect interest payments and repayment of principal amount. Hence, the cost of debt is often “cheap” relative to equity. Further, in the event of issuer bankruptcy, bondholders must be fully repaid before common shareholders are paid. Therefore, fixed income securities such as bonds are often called “senior” securities. Main classes of corporate bond issuers include:
Governments utilize debt securities to raise capital and plan capital expenditure because of its predictable cash flows and access to enormous capital sources.
Agency bonds are issued by two types of entities:
Agency bonds issued by GSEs and federal government agencies are priced very similarly; however, due to the distinction that all federal government agencies are explicitly guaranteed by the federal government, GSE debt securities are priced at a slight premium. In general, all agency bonds are priced at a small premium to treasury bonds because of associated political risk – agency status could be modified or revoked – and because treasury bonds are the most liquid financial instruments in the capital markets.