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.

RELATED TERMS
  1. Baby Bells

    The Baby Bells were the U.S. regional telephone companies that ...
  2. Bond Market

    The bond market is the environment in which the issuance and ...
  3. Utilities Sector

    The utilities sector encompasses stocks from electric, gas, water ...
  4. Bond Fund

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

    A municipal bond whose face value of the bond is greater than ...
  6. Municipal Bond

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

    Top 4 Communications Mutual Funds

    Discover some of the best mutual funds in the communications sector, and learn how investors can position investments within these funds.
  2. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  3. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  4. Retirement

    Should I Invest in Bonds After I Retire?

    Yes, retirees should invest in bonds, but remember that not all bonds are safe investments. Seek the help of a financial advisor.
  5. 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.
  6. 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.
  7. Investing

    Bond Funds Boost Income, Reduce Risk

    Bond funds can provide stable returns for those who depend on their investment income.
  8. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
RELATED FAQS
  1. What is the telecommunications sector?

    The telecommunications sector is comprised of companies that transmit data in words, voice, audio or video across the globe. Read Answer >>
  2. How does government regulation impact the telecommunications sector?

    Read about the many ways the U.S. government regulates the telecommunications industry, including radios, telephones, TV ... Read Answer >>
  3. To what extent are utility stocks affected by changes in interest rates?

    Explore the current state of the utilities sector, and learn about the different ways an increase in interest rates may impact ... Read Answer >>
Trading Center