Is the need to issue bonds a telltale sign that the company would have a hard time paying coupons?
"No, having to borrow money does not necessarily mean a company will have a hard time paying the interest on it. Similarly, having to take out a mortgage on a house does not mean a person will not be able to make their mortgage payments. Borrowing money can be a way to spend future money instead of present money (at a cost, of course). A company might not have all that money at the moment, but that in no way implies they won't have it in the future. And as you allude to in your question where you talk about ""funding some … plans"", a company might be able to grow itself—possibly increasing future profits—by borrowing money." Apple is currently the most valuable company in the world by market capitalisation and it has issued bonds for instance. Amazon have also issued bonds in the past as have Google. One of many reasons companies may issue bonds is to reduce their tax bill. If a company is a multinational it may have foreign earnings that would incur a tax bill if they were transferred to the holding company's jurisdiction. The company can however issue bonds backed by the foreign cash pile. It can then use the bond cash to pay dividends to shareholders. Ratings Agencies such as Moody's, Fitch and Standard & Poor's exist to rate companies ability to make repayments on debt they issue. Investors can read their reports to help make a determination as to whether to invest in bond issues. Of course investors also need to determine whether they believe the Ratings Agencies assesments. One more scenario is when the company already has maturing debt.  e.g Company took out a debt of 2 billion in 2010 and is maturing 2016. It has paid back say 500 million but has to pay back the debtors the remaining 1.5 billion. It will again go to the debt markets to fund this 1.5 billion maybe at better terms than the 2010 issue based on market conditions and its business. The debt is to keep the business running or grow it. The people issuing debt will do complete research before issuing the debt. It can always sell stock but that results in dilution and affects shareholders. Debt also affects shareholders but when interest rates are lower, companies tend to go to debt markets. Although sometimes they can just do a secondary and be done with it if the float is low. "People borrow money all the time to buy a house. Banks will lend money on one (up to 80%, sometimes more), because they consider it an ""investment."" If you own a large company and want to expand, a bank or bond issuer will first look at what you plan to do with the money, like build new factories, or whatever. Based on their experience, they may judge that you will earn enough money to pay them back. If you don't, they may ""repossess"" your factories and sell them to someone who can pay. As protection, you may be asked to ""mortgage"" your existing company to protect the lenders of the new money. If you don't pay back the money, the lenders get not only your new ""factories"" but also your existing company." It (usually) is better to use Other Peoples Money (OPM) than your own. This is something that Donald Trump has mastered. If you use OPM and something goes wrong you can declare bankruptcy and wipe out that debt. The Donald has done this more than once.  At the fantastic low Intrest rates a company would be wasting resources if they only used their own money.
"The first thing that it is important to note here is that the examples you have given are not individual bond prices.  This is what is called the ""generic"" bond price data, in effect a idealised bond with the indicated maturity period.  You can see individual bond prices on the UK Debt Management Office website. The meaning of the various attributes (price, yield, coupon) remains the same, but there may be no such bond to trade in the market.  So let's take the example of an actual UK Gilt, say the ""4.25% Treasury Gilt 2019"".  The UK Debt Management Office currently lists this bond as having a maturity date of 07-Mar-2019 and a price of GBP 116.27.  This means that you will pay 116.27 to purchase a bond with a nominal value of GBP 100.00.  Here, the ""nominal price"" is the price that HM Treasury will buy the bond back on the maturity date.   Note that the title of the bond indicates a ""nominal"" yield of 4.25%.  This is called the coupon, so here the coupon is 4.25%.  In other words, the treasury will pay GBP 4.25 annually for each bond with a nominal value of GBP 100.00.  Since you will now be paying a price of GBP 116.27 to purchase this bond in the market today, this means that you will be paying 116.27 to earn the nominal annual interest of 4.25.  This equates to a 3.656% yield, where 3.656% = 4.25/116.27.   It is very important to understand that the yield is not the whole story.  In particular, since the bond has a nominal value of GBP100, this means that as the maturity date approaches the market price of the bond will approach the nominal price of 100. In this case, this means that you will witness a loss of capital over the period that you hold the bond.  If you hold the bond until maturity, then you will lose GBP 16.27 for each nominal GBP100 bond you hold.  When this capital loss is netted off the interest recieved, you get what is called the gross redemption yield.  In this case, the gross redemption yield is given as approximately 0.75% per annum. NB.  The data table you have included clearly has errors in the pricing of the 3 month, 6 month, and 12 month generics." Usually the market.  I'm a company issuing a 5-year bond with 5% coupon payments. It goes on the market to whoever is willing to pay the most for it. The prices that those investors pay implies what the required yield is. For instance, if they're willing to pay exactly face value for the bond, then that shows they have a required return of (in this case) 5%. Paying more or less for the bond implies a require rate less than or greater than 5%, with the exact amounts derivable with basic algebra.  The same principle can be applied to any other asset. You’ve really got three or four questions going here… and it’s clear that a gap in understanding one component of how bonds work (pricing) is having a ripple effect across the other facets of your question. The reality is that everybody’s answers so far touch on various pieces of your general question, but maybe I can help by integrating. So, let’s start by nailing down what your actual questions are:  1. Why do mortgage rates (tend to) increase when the published treasury bond rate increases? I’m going to come back to this, because it requires a lot of building blocks. 2. What’s the math behind a bond yield increasing (price falling?)  This gets complicated, fast. Especially when you start talking about selling the bond in the middle of its time period. Many people that trade in bonds use financial calculators, Excel, or pre-calculated tables to simplify or even just approximate the value of a bond. But here’s a simple example that shows the math.  Let’s say we’ve got a bond that is issued by… Dell for $10,000. The company will pay it back in 5 years, and it is offering an 8% rate. Interest payments will only be paid annually. Remember that the amount Dell has promised to pay in interest is fixed for the life of the bond, and is called the ‘coupon’ rate. We can think about the way the payouts will be paid in the following table:   As I’m sure you know, the value of a bond (its yield) comes from two sources: the interest payments, and the return of the principal. But, if you as an investor paid $14,000 for this bond, you would usually be wrong. You need to ‘discount’ those amounts to take into account the ‘time value of money’. This is why when you are dealing in bonds it is important to know the ‘coupon rate’ (what is Dell paying each period?). But it is also important to know your sellers’/buyers’ own personal discount rates. This will vary from person to person and institution to institution, but it is what actually sets the PRICE you would buy this bond for.  There are three general cases for the discount rate (or the MARKET rate). First, where the market rate == the coupon rate. This is known as “par” in bond parlance. Second, where the market rate < the coupon rate. This is known as “premium” in bond parlance. Third, where the market rate > coupon rate. This is known as a ‘discount’ bond.  But before we get into those in too much depth, how does discounting work? The idea behind discounting is that you need to account for the idea that a dollar today is not worth the same as a dollar tomorrow. (It’s usually worth ‘more’ tomorrow.) You discount a lump sum, like the return of the principal, differently than you do a series of equal cash flows, like the stream of $800 interest payments. The formula for discounting a lump sum is:  Present Value=Future Value* (1/(1+interest rate))^((# of periods)) The formula for discounting a stream of equal payments is:  Present Value=(Single Payment)* (〖1-(1+i)〗^((-n))/i) (i = interest rate and n = number of periods) **cite investopedia So let’s look at how this would look in pricing the pretend Dell bond as a par bond. First, we discount the return of the $10,000 principal as (10,000 * (1 / 1.08)^5). That equals $6,807.82.  Next we discount the 5 equal payments of $800 as (800* (3.9902)). I just plugged and chugged but you can do that yourself. That equals $3,192.18. You may get slightly different numbers with rounding.  So you add the two together, and it says that you would be willing to pay ($6,807.82 + $3,192.18) = $10,000. Surprise! When the bond is a par bond you’re basically being compensated for the time value of money with the interest payments. You purchase the bond at the ‘face value’, which is the principal that will be returned at the end.  If you worked through the math for a 6% discount rate on an 8% coupon bond, you would see that it’s “premium”, because you would pay more than the principal that is returned to obtain the bond [10,842.87 vs 10,000]. Similarly, if you work through the math for a 10% discount rate on an 8% coupon bond, it’s a ‘discount’ bond because you will pay less than the principal that is returned for the bond [9,241.84 vs 10,000].  It’s easy to see how an investor could hold our imaginary Dell bond for one year, collect the first interest payment, and then sell the bond on to another investor. The mechanics of the calculations are the same, except that one less interest payment is available, and the principal will be returned one year sooner… so N=4 in both formulae.  Still with me? Now that we’re on the same page about how a bond is priced, we can talk about “Yield To Maturity”, which is at the heart of your main question.  Bond “yields” like the ones you can access on CNBC or Yahoo!Finance or wherever you may be looking are actually taking the reverse approach to this. In these cases the prices are ‘fixed’ in that the sellers have listed the bonds for sale, and specified the price. Since the coupon values are fixed already by whatever organization issued the bond, the rate of return can be imputed from those values.  To do that, you just do a bit of algebra and swap “present value” and “future value” in our two equations.  Let’s say that Dell has gone private, had an awesome year, and figured out how to make robot unicorns that do wonderful things for all mankind. You decide that now would be a great time to sell your bond after holding it for one year… and collecting that $800 interest payment. You think you’d like to sell it for $10,500. (Since the principal return is fixed (+10,000); the number of periods is fixed (4); and the interest payments are fixed ($800); but you’ve changed the price... something else has to adjust and that is the discount rate.) It’s kind of tricky to actually use those equations to solve for this by hand… you end up with two equations… one unknown, and set them equal. So, the easiest way to solve for this rate is actually in Excel, using the function =RATE(NPER, PMT, PV, FV). NPER = 4, PMT = 800, PV=-10500, and FV=10000. Hint to make sure that you catch the minus sign in front of the present value… buyer pays now for the positive return of 10,000 in the future.  That shows 6.54% as the effective discount rate (or rate of return) for the investor. That is the same thing as the yield to maturity. It specifies the return that a bond investor would see if he or she purchased the bond today and held it to maturity.  3. What factors (in terms of supply and demand) drive changes in the bond market? I hope it’s clear now how the tradeoff works between yields going UP when prices go DOWN, and vice versa. It happens because the COUPON rate, the number of periods, and the return of principal for a bond are fixed. So when someone sells a bond in the middle of its term, the only things that can change are the price and corresponding yield/discount rate.  Other commenters… including you… have touched on some of the reasons why the prices go up and down. Generally speaking, it’s because of the basics of supply and demand… higher level of bonds for sale to be purchased by same level of demand will mean prices go down. But it’s not ‘just because interest rates are going up and down’. It has a lot more to do with the expectations for 1) risk, 2) return and 3) future inflation. Sometimes it is action by the Fed, as Joe Taxpayer has pointed out. If they sell a lot of bonds, then the basics of higher supply for a set level of demand imply that the prices should go down. Prices going down on a bond imply that yields will go up. (I really hope that’s clear by now). This is a common monetary lever that the government uses to ‘remove money’ from the system, in that they receive payments from an investor up front when the investor buys the bond from the Fed, and then the Fed gradually return that cash back into the system over time.  Sometimes it is due to uncertainty about the future. If investors at large believe that inflation is coming, then bonds become a less attractive investment, as the dollars received for future payments will be less valuable. This could lead to a sell-off in the bond markets, because investors want to cash out their bonds and transfer that capital to something that will preserve their value under inflation. Here again an increase in supply of bonds for sale will lead to decreased prices and higher yields.  At the end of the day it is really hard to predict exactly which direction bond markets will be moving, and more importantly WHY. If you figure it out, move to New York or Chicago or London and work as a trader in the bond markets. You’ll make a killing, and if you’d like I will be glad to drive your cars for you.  4. How does the availability of money supply for banks drive changes in other lending rates?  When any investment organization forms, it builds its portfolio to try to deliver a set return at the lowest risk possible. As a corollary to that, it tries to deliver the maximum return possible for a given level of risk.  When we’re talking about a bank, DumbCoder’s answer is dead on. Banks have various options to choose from, and a 10-year T-bond is broadly seen as one of the least risky investments. Thus, it is a benchmark for other investments.  5. So… now, why do mortgage rates tend to increase when the published treasury bond yield rate increases? The traditional, residential 30-year mortgage is VERY similar to a bond investment. There is a long-term investment horizon, with fixed cash payments over the term of the note. But the principal is returned incrementally during the life of the loan.  So, since mortgages are ‘more risky’ than the 10-year treasury bond, they will carry a certain premium that is tied to how much more risky an individual is as a borrower than the US government.  And here it is… no one actually directly changes the interest rate on 10-year treasuries. Not even the Fed. The Fed sets a price constraint that it will sell bonds at during its periodic auctions. Buyers bid for those, and the resulting prices imply the yield rate. If the yield rate for current 10-year bonds increases, then banks take it as a sign that everyone in the investment community sees some sign of increased risk in the future. This might be from inflation. This might be from uncertain economic performance. But whatever it is, they operate with some rule of thumb that their 30-year mortgage rate for excellent credit borrowers will be the 10-year plus 1.5% or something. And they publish their rates. "Like all financial investments, the value of a bond is the present value of expected future cash flows.  The Yield to Maturity is the annualized return you get on your initial investment, which is equivalent to the discount rate you'd use to discount future cash flows. So if you discount all future cashflows at 6% annually*, you can calculate the price of the bond: So the price of a $1,000 bond (which is how bond prices are typically quoted) would be $1,097.12. The current yield is just the current coupon payment divided by the current price, which is 70/1,097.12 or 6.38% Question 3 makes no sense, since the yield to maturity would be the same if you bought the bond at market price Question 4 talks about a ""sale"" date which makes me think that it assumes you sold the bond on the coupon date, but you'd have to know the sale price to calculate the rate of return." That's an interesting observation. Do you have any examples?   I wonder if this topic has been research: is it better to spend cash up-front to kill a threat than to concede some market share and earn less for longer in the future? Surely, the target company knows they are a strategic asset, and won't sell themselves cheap. As no one has mentioned them I will...  The US  Treasury issues at least two forms of bonds that tend to always pay some interest even when prevailing rates are zero or negative.  The two that I know of are TIPS and I series bonds. Below are links to the descriptions of these bonds: http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips.htm http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm "I can, but it takes a significant amount of time.   I'll do a short version which unfortunatley might leave more holes than you like. Basically, traders don't want to barter because it is hard to find the person with precisely the goods you want who wants to trade for the goods you have. Thus the need for ""coupons"" that represent value in a marketplace. Then you need to decide who gets to create coupons. If too many can issue them, problems arise, and no one trusts the coupons will be good later. Eventually you want one large bank/nation/trader to be able to issue them so everyone has the same level of trust in them, and you don't have the economic inefficiencies of many coupon issuers.  Next, the number of coupons needs to be enough to facilitate trade. If the amount of trade increases a lot, and the number of coupons doesn't increase similarly they become worth more, and people start to hoard them. This causes deflation, which causes less investment, which causes less growth, which hurts everyone in the long run.   If there are too many coupons added, this causes inflation, which causes people to spent them quicker instead of holding them. For reasons I won't cover here slight, predictable inflation is much better than deflation, so remember inflation is slightly preferred. Note that inflation is often caused not by the number of coupons but by external price changes.  Now, for a modern economy to do well, somone has to watch the economy, measure it carefully, and add/subtract coupons into the system as needed. Coupons, like all money, have no real value (whatever that means), but only have value because the holder expects to be able to trade them *later* for goods and services. You cannot eat coupons, use them for shelter (usually!), or wear them, but you want to trade them for such needs. The same is true for paper money, gold, stones, or almost whatever money system one uses. Money in all these forms is merely an IOU tradable for future goods.  The Fed is tasked (among other things) with making sure there is precisely enough coupons in the economy to keep trade functioning as well as possible. This is very hard to do since there are external and internal shocks to an economy (think disaster, foreign govts shutting off resources, rapid changes in people's tastes, etc.).   Central banks such as the Fed need to be independent of political control, since empirical evidence has shown that politicians tend to add more money to the system than is needed, because the short term gains give them votes, but the long term consequences (rapid inflation, unemployment, lower economic growth) are bad for society. This is why the Fed is largely out of congressional control, and large amounts of empirical evidence across hundreds of years and dozens of cultures shows this to be good.  Note: another function of the Fed is to be a lender of last resort to help prevent bank panics that were widespread in the 18th and early 19th century, something that none of us now remember, but it was a real problem. I'll skip that part for now.  So now we're at the point where the Fed needs to add/subtract coupons from society. To do this part justice takes significant time to cover all the reasons why various rules are in place (banking reserve requirements, for example), and you cannot learn it from one pass of reading.  But I'll try. Instead of being like the majority of internet fools that rail against the system, try to learn the *why* of all this, and you'll be much wiser and understand that it is all a pretty good system.  One method they use is the interbank lending rate. Banks have a reserve requirement, which is the ratio of coupons they need to have on hand as a ratio compared to the total coupons depositors lent them. This is usually around 1:10. The amount deposited that they can lend goes to business loans, school loans, mortgage loans, etc., and helps economies grow. Now when a bank on a given day falls short due to too many withdrawals, other banks (or the Fed) offers an overnight loan to meet reserve requirements, and the Fed sets the interest rate, which in turn drives other interest rates in the system.  This does not change the money supply very much.  Secondly, the Fed sets the reserve requirement, which vastly can change the amount of money available to society. But they change this rate so rarely (all the historical data is on the St. Loius Fed site, among others) that it is not usually an issue. I'll explain below how this can drastically change the money supply though the money multiplier.  Thirdly, and this is the part the poster above seems upset about, they conduct open market operations. This is the primary means by which the Fed exercises control over the number of coupons in play. The government, like businesses, like individuals, often needs to borrow money, in theory to invest in wise causes like infrastructure or perhaps money making enterprises such as technology investmeny (and I know what they often use the money for causes many to complain). The government, like companies, offers the sale of various contracts such as bonds to investors, who want a place to park some accumulated coupons for safety, and they get a return plus some interest. So the government sells bonds on the open market to investors, banks, pensions, foreign governments, basically to whomever wishes to purchase them at the market rate, and the government, like many individuals and banks, uses these loans to perform day to day functioning and possible smooth out volatility in spending needs. By law the Fed cannot purchase directly from Treasury. Now, once on the market, these bonds are traded, packaged, resold, etc., since they have inherent value, and since those owning them want to buy/sell them, perhaps before maturity date. This ""liquidity"" (ability to sell your goods) is necessary - fewer would purchase an item if they could not sell it when they desire. Thus bonds are bought, sold, and traded, and their prices fluctuate based on what the market thinks they are worth, just like any good.  Now, the Fed can buy/sell these bonds on the *open market*, like anyone else. So when the Fed wishes to increase the money supply, they can buy bonds that are not ""spendable"" money and inject money into the system. Note they now hold a bond that had at the time of transaction the same value as the money they injected. Note investors freely bought these from Treasury, meaning the market thought at the time of purchase that this was a good invesement. It is *not* the government merely wishing more money into existance. It is market forces that require more money for trades and is selling goods from the marketplace of (presumably) equal value to the Fed. This increases liquidity, but takes valuable assets from circulation. When the Fed wishes to shrink the money supply, they sell these bonds back into circulation basically by offering better terms than Treasury. In fact, you can find graphs of the Fed operations and see how every December they inject money for more Christmas shpping (need more coupons for more trade) and every January they extract some.  So open market transactions, buying and selling goods at market prices in the marketplace along with other traders, is how the Fed injects and removes money from the money supply. This is the primary mechanism that the Fed uses to control the number of coupons in the economy.  Finally, a little about reserve requirements and the money multiplier, since it affects so much of the number of coupons in play. This also I must simplify drastically. Each bank needs to hold 1/10 of all deposits in cash. The rest can be lent, which lands in another bank, which again can be lent, etc... Thus each $1 deposited can result in loans totalling 9/10 + (9/10)^2 + (9/10)^3 +... = 9 more dollars. Many people claim that banks are printing money, which is nonsense, since each also has an equal debt to pay to the person they borrowed from. When all loans are paid back there is no net money gain.  However, this allows for each $1 the Fed injects by buying bonds for there to be up to $9 in the economy, *if banks all loan to the fullest extent*. Banks tend to want to loan since loaned money makes them profit. Banks used to loan too much and runs on the banks caused significant problems, which is why laws were made to require *all* banks to have the same reserve requirement.  Now, when banks get scared and stop loaning, this 9 fold multiplier dries up, and the Fed has much less inpact on being able to target the proper number of coupons to keep the economy smooth. During the recent crash when banks stopped loaning, as each dollar was paid back on debts, there was significant shrinkage of available money for transactions, and this kills the economy. This is the ""liquidity crisis"".   Hope this helps. As I said, this is vastly simplified and I cannot go into all the reasons and historical items needed to understand it fully. It is a vastly complex (and necessarily so) and takes significant study to grasp the genius of it. It's similar to not being able to understand nuances of particle physics in one go, but as you study and work at it you see *why* things go as they do, and you learn all the failed methods (the gold standard is one example) that were thrown out for many good reasons.  Cheers." &gt;Executives commonly get good payouts from these things.  First, when companies are in some of bankruptcy or financial distress, they are forced to pay more to retain certain personnel due to the nature of the situation. If the executives left, then nobody would be willing to come in and wind up the assets of the company. It would end up costing even *more* money in the long run because you won't get talented people and you will have to bring in people with little to no knowledge of your company or your industry.  Second, bankruptcy law provides very clear guidelines for the priority of different creditors. And this is tied into the incentives that we want to encourage. If secured creditors did not get priority, then they would never lend and we would not have economic growth. The reason equity shareholders are last in priority is because they took on the risk of owning the company.