Context:
Exim Bank withdrew its planned ₹2,500 crore 10-year bond issuance after investors demanded higher-than-expected yields, according to multiple market sources.
Bonds in Corporate Financing
Bonds serve as a form of loan between an investor and a corporation. When a company issues bonds, it borrows a specific amount of money from investors, agreeing to pay back the principal amount along with periodic interest payments until the bond matures. Once the bond matures, the company repays the principal, concluding the bond agreement.
Bonds vs. Other Methods of Raising Capital
Bonds vs. Bank Loans
- Interest Rates: Companies typically pay lower interest rates on bonds compared to bank loans, which is advantageous for firms aiming to minimize their borrowing costs.
- Operational Freedom: Unlike bank loans, which often come with restrictive conditions (such as prohibiting further debt issuance or acquisitions), bonds offer greater operational freedom without such strings attached.
Key Features of Bonds
- Types of Bonds:
- Collateralized Bonds: These bonds are backed by a company’s assets (e.g., real estate or equipment). If the company defaults, the bondholders can claim these assets.
- Unsecured Bonds: These are not backed by any assets, and therefore carry higher risk and typically higher interest rates.
- Convertible Bonds: These bonds can be converted into a specified number of shares, allowing bondholders to benefit from rising stock prices.
- Callable Bonds: These bonds can be redeemed by the issuing company before the maturity date, especially if interest rates decrease, allowing the company to refinance at a lower rate.
- Interest Rates: A bond’s interest rate is influenced by factors like the company’s credit quality and the duration of the bond. Healthier companies or those issuing shorter-term bonds typically offer lower interest rates.
Why Companies Issue Callable Bonds
- Interest Rate Flexibility: Callable bonds allow companies to redeem and reissue debt at a lower interest rate if market rates drop. This lowers the cost of capital for the company, similar to refinancing a mortgage at a lower rate.
Corporate Bonds vs. Government Bonds
- Issuer: Corporate bonds are issued by companies to fund business activities, while government bonds are issued by governments to finance public expenditures.
- Risk and Return: Corporate bonds are generally riskier than government bonds, as corporations are more likely to default. However, this increased risk often results in higher returns for corporate bondholders.
