Hey everyone,
We've started teaching daily commercial awareness on Instagram. You can give us a follow here:
https://www.instagram.com/thecorporatelawacademy/.
If you don't have Instagram, don't worry - I'll start including these posts in our
emails:
Here's a sample of our latest post:
Imagine you own a company.
You need money to fund your day-to-day needs and any investments you want to make.
Sometimes, you can fund those things from the profits your business generates. But what if you're not making enough profit?
You need to raise money.
If you're a company and you want to raise money, you have two primary options:
equity finance and
debt finance.
Equity finance means selling shares in your business to raise money.
Debt finance means raising money through borrowing. That's how we get to bonds. Bonds are an example of debt finance. In other words, they're an instrument to help you raise money through borrowing.
If you want to raise money using bonds, you can sell bonds to investors. We call this ‘
issuing bonds’ and we call you the ‘
issuer’.
Investors buy these bonds for a particular sum of money. So by issuing bonds, you are raising the money you need for your business.
In return for buying a bond, you promise to pay investors regular interest payments over a period of time. At the end of that period of time, you pay the investors their original sum back (the money they paid for the bond). We call this repayment date, the '
maturity date'. We call the original sum, the '
principal'.
Why would an investor want to invest in your bonds?
Well, they want to make money. Buying bonds from your company means they get to receive interest payments, in addition to the money they lent you in the first place.
They do have to take on the risk though. They need to judge that your company won't go bust. If you do go bust and fail to make a payment, we call this a
default.
Note, companies aren't the only ones that issue bonds. Governments do too.
We call UK government bonds '
gilts' and US government bonds '
treasuries'.
Government are typically seen as a much safer investment. Companies could go bust, but it's less likely a government will. You can, however, look at examples in history when government defaulted or were at risk of defaulting.
