What is a 'Telephone Bond'

Telephone bonds are debt securities issued by telecommunications companies.

BREAKING DOWN 'Telephone Bond'

Telephone bonds have existed since the early 1900s as a means for early telephone companies to raise funds for capital expenditures. The securities promised a safe, steady income stream since the telephone companies gained revenues through traditional landline phone service subscriptions and long-distance charges. Prior to 1984, the U.S. telephone industry saw little competition, further reducing the risk of default on telephone bonds.

While utilities produce regular revenues through their subscription operations, building out and maintaining their infrastructure requires large amounts of capital. Network upgrades and expansions typically require telecom companies to raise debt. Since AT&T operated as a regulated monopoly for most of the 20th century, investors saw its debt issuances as extremely safe.

After the breakup of AT&T’s Bell System in 1984, industry deregulation encouraged competition, adding an element of risk to telephone company debt. The telecommunications industry changed further as cable television companies began to build out broadband internet networks and wireless cellular service supplanted landline service. Competing telecommunications companies found themselves raising debt to develop, maintain and upgrade new networks as technologies advance and consumers become more dependent on moving large amounts of data across networks. The faster wireless technology evolves, the faster companies must spend to upgrade networks in an attempt to stay ahead of competitors.

Today, telephone bonds represent a riskier investment, though investors interested in purchasing telecommunications bonds have many more options from which to choose than they did in the early days of AT&T.

Telephone Bonds Compared to Utility Revenue Bonds

The sense of telephone bonds as boring, safe investments grew out of the telephone network’s position as a quasi-public utility. Utilities generally refer essential services, particularly water, electricity and gas, which require infrastructure investment to ensure their availability to the public. As telecommunications services have moved away from landline telephone networks, they behave less like a utility and more like a commodity, especially where customers can choose from multiple wireless network providers.

Funding for plain-vanilla utility infrastructure projects such as the electrical grid or water supply pipelines often come from utility revenue bonds issued by municipalities. These securities repay bondholders through revenues earned through use of the infrastructure. Since municipalities generally rely on a single electrical grid and water supply system to provide services to the public, these revenues come with a practical guarantee closely resembling the situation in the early days of the telephone, which also operated largely on a single network.

  1. Telecom ETF

    A telecom ETF is an exchange-traded fund investing in telecom ...
  2. Mail, Internet Or Telephone Order ...

    The Mail, Internet or Telephone Order Merchandise Rule is a regulation ...
  3. Bond Fund

    A bond fund is a fund invested primarily in bonds and other debt ...
  4. Obligation Bond

    A municipal bond whose face value of the bond is greater than ...
  5. Revenue Bond

    A revenue bond is a municipal bond supported by the revenue from ...
  6. Municipal Bond

    A municipal bond is a debt security issued by a state, municipality ...
Related Articles
  1. Small Business

    Antitrust Defined

    Check out the history and reasons behind antitrust laws, as well as the arguments over them.
  2. Investing

    Why Muni Bonds and Bond Funds are Perfect Together

    Municipal bonds and bond funds differ in several ways, which is partly why they complement each other well.
  3. Investing

    Invest in Municipal Bonds During Rate Hikes

    Discover five reasons why investing in municipal bonds when the Federal Reserve hikes interest rates can be a great way to boost investment income.
  4. Investing

    U.S. Corporate Bonds: The Last Safe Place to Make Money

    There aren't many other sources right now for relatively safe, steady income.
  5. Investing

    Six biggest bond risks

    Bonds can be a great tool to generate income, but investors need to be aware of the pitfalls and risks of holding corporate and/or government securities.
  6. Financial Advisor

    The Top 5 Small Cap Telecommunication Stocks for 2016 (CBB, SHEN)

    Identify five small-cap telecommunication stocks that should be on your watchlist for 2016; analyze these stocks based on financials and recent performance.
  7. Investing

    Corporate Bonds for Retirement Accounts

    Corporate bonds are usually the preferred choice in retirement accounts. Here are some of the benefits of corporate bonds, and strategies for a portfolio.
  8. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  1. Government Regulated Impact on the Telecommunications Sector

    The U.S. government regulates the telecommunications industry, including radios, telephones, TV and the Internet. Read Answer >>
Trading Center