Who Issues Bonds?

TL;DR

The credit worthiness of bonds is determined by the issuer's ability to generate income, with government bonds being less risky than corporate or municipal bonds.

Transcript

When thinking about the credit worthiness of  a bond, it's important to consider the issuer   behind the bond. More specifically,  it's important to understand how an   issuer earns money to make interest  payments and pay back the principal.  To help you understand this, let's examine  the U.S. government. Consider a 10-year bond,   or note, issue... Read More

Key Insights

• 💳 The credit worthiness of a bond depends on the source of income supporting the issuer.
• 🥹 Government bonds backed by taxes are considered less risky than corporate or municipal bonds.
• 💄 Corporate bonds are more susceptible to economic fluctuations and market competition, making them riskier.
• 🚕 Municipal bonds have a smaller tax base and fewer resources, increasing their perceived risk in comparison to government bonds.
• ✋ Riskier entities offer higher yields on bonds to compensate for the increased risk.
• ⌛ The ability to collect taxes and levy additional taxes during tough economic times strengthens the credit worthiness of government bonds.
• 🥹 Municipal bonds may be backed by financial resources other than tax revenues.

Questions & Answers

Q: How does the U.S. government's ability to collect taxes impact the credit worthiness of its bonds?

The U.S. government can collect taxes regardless of the overall economy, ensuring a steady stream of income to pay its debts and interest on time.

Q: Why are corporate bonds considered riskier than government bonds?

Corporate bonds rely on a corporation's earnings and assets, which can vary due to economic swings or market competition, increasing the risk of missing payments or failing to repay the principal.

Q: Why are municipal bonds considered riskier than government bonds?

Municipal bonds depend on smaller tax bases and fewer economic resources of cities, making it harder for them to meet financial obligations, resulting in higher perceived risk.

Q: How do bond issuers with lower credit worthiness compensate for the increased risk?

Issuers with lower credit worthiness, such as corporations, offer higher interest rates to attract investors and offset the higher risk of default.

Summary & Key Takeaways

• The credit worthiness of a bond depends on the issuer's ability to earn money to make interest payments and repay the principal.

• Government bonds, backed by tax revenues, are considered less risky because taxes are collected regardless of the economy's performance.

• Corporate bonds rely on a corporation's earnings and assets, which can fluctuate and increase the credit risk.

• Municipal bonds, issued by cities, have a smaller tax base and fewer economic resources, making them riskier than government bonds.