Many different types of entities issue bonds in an effort to raise working capital. Corporations, and municipalities, along with the United States Government and US Government agencies, all issues bonds in order to meet their capital needs. A bond represents a loan to the issuer in exchange for its promise to repay the face amount of the bond known as the principal amount at maturity. On most bonds the investor receives semi-annual interest payments during the bond’s term. These semi-annual interest payments, along with any capital appreciation or depreciation at maturity, represent the investor’s return. A bondholder invests primarily for the interest income that will be generated during the bonds term.
Corporations will issue bonds in an effort to raise working capital to build and expand their business. Corporate bondholders are not owners of the corporation; they are creditors of the company. Corporate debt financing is known as leverage financing because the company pays interest only on the loan until maturity. Bondholders do not have voting rights so long as the company pays the interest and principal payments in a timely fashion. If the company defaults, the bondholders may be able to use their position as creditors to gain a voice in the company’s management. Bondholders will always be paid before preferred and common stockholders in the event of liquidation. Interest income received by investors on corporate bonds is taxable at all levels, federal, state and local.
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