COPYRIGHTED MATERIAL
or bondholder ) is lending money to the corporation or government. They have no equity (ownership) interest in the issuer. The note or bond represents a promise that the debt will be repaid by a specified date, called the maturity date . Notes usually mature sooner than bonds. Bonds can have maturity dates as far as 30 years out. Bondholders and noteholders receive regular interest payments (also called coupon payments) from the issuer. If interest isn’t paid as and when promised, the bond or note is in default . Compare that to equity securities, where most shareholders receive a dividend only at the discretion of the board of directors. Another difference between equity and debt securities is evidenced by repayment priorities when a company fails. If a company fails and has to sell off assets and property to pay its debts, bondholders are paid before any money goes to shareholders . As owners, shareholders are the last in line to recover their investment . Debts must be repaid first. State and Municipal Bonds Another important difference between debt and equity securities is that, while governments can’t issue shares of stock to raise capital, they can issue notes and bonds . Municipal and state governments often need to raise money for public works like a library, airport, sewer, or roadway improvement. Since raising taxes to pay for these things usually goes over like a lead balloon with taxpayers, bonds are a relatively noncontroversial alternative means to fund public works. It is how governments “borrow” money from the public. Here’s how it’s done. A local government, like a city or county creates a special bond district , which is a unit of government , not a place. The special district issues the bonds and lists them with a securities exchange for sale to the public. Sometimes the project itself is looked to for generating the revenue to pay interest and repay the bonds on the maturity date; sometimes taxpayers vote to sponsor the bond district, permitting a small and temporary tax increase such as a .05% sales tax increase for 10 years to fund a particular project. Anyone, anywhere in the world can buy a bond. That means an investment fund in Germany may own municipal bonds issued by a city in Oregon, an investor in Singapore may own bonds issued to fund the construction of a bridge in Florida, or a Chilean retirement fund may own municipal bonds issued by a city in India. You can see how commerce truly is global, with interdependent economies and financial interests! Treasury bills, notes and bonds. Engage students in a discussion. Have you ever heard of a treasury bond ? Sometimes they are called savings bonds . They are often given as gifts for birthdays or graduations. Does anyone own a treasury bond? The U.S. federal government issues bills , notes , and bonds in massive quantities on a regular basis. Collectively, they are called treasuries because they are issued by the U.S. Treasury Department . There is not a lot of difference between treasury bills, notes and bonds, except for the maturity dates. Bills have maturity dates of a year or less. Notes have shorter maturities than bonds – which can be payable as far as 30 years in the future. Unfortunately, these days most of the money the federal government raises by selling treasuries, goes to pay interest on the treasuries it has already issued. That’s right –the government borrows money to pay its debts. (Remind students that the Federal Reserve Bank, through its Open Market Operations, buys up or sells bonds as a SLIDE 14I PRODUCT PREVIEW
Lesson 14 | Who Put the Wall in Wall Street? 262
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