A:

The North American Securities Administrators Association (NASAA) has acknowledged that "church bonds" are allowed to be issued under certain guidelines. These bonds can be issued only by religious affiliates that are identified as being a "church", "parish", "mosque" or a "synagogue", and can only be used to finance anything related to church property. For instance, the issuing church can use the raised funds to build a church structure, or upgrade church property. The funds only are allowed to better church property, and cannot be used to directly generate revenues.

These types of bonds are backed by collateral by the issuing church, in the form of church property. This is mandated, under most circumstances, because most churches do not have enough financial capital or cash flow to accommodate a non-secured form of debt. In light of this, the church also must set up a sinking fund, and make large enough payments into the fund - as set out by the minimum standards by the NASAA - that can cover coupon payments and eventually the face value of the bonds.

Along with the sinking fund payment schedule, the church also must release financial data so bond holders know the financial strength of the church, and can determine if the bond is worth purchasing. These financial statements must include a Cash Flow Statement, Balance Sheet and Income Statement, all of which must be audited. During the holding period, the bond holder may request financial data from the church at any time, and must receive the most recent financial data available.

It is important to remember that no matter if you are purchasing a church bond, or regular bond, the likelihood of repayment is the most important factor. This will help you determine if the bond will provide you with a high enough return, and will compensate you for the risks you may be taking.

To learn more about bonds, read Bond & Debt Basics or Advantages Of Bonds.

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