Issuing and Buying Corporate and Municipal Bonds
Issuing corporate bonds was one of the most anticipated features of the Banking and Finance DLC. Against a bank loan it offers lower interest expense, which makes it the preferred way of raising funds for most businesses.
Issuing a bond
Open Financial Actions from the Information Center (hotkey F11) and select Issue New Bonds at the top right. Set the issue quantity and the term length, then click Issue Now.
| Parameter | Range |
|---|---|
| Term length | 5, 10, 15 or 20 years |
| Bond credit rating | AAA at the top down to D at the bottom |
What the credit ratings mean
| Rating | Grade |
|---|---|
| AAA | Prime investment-grade |
| AA | High investment-grade |
| A | Upper medium investment-grade |
| BBB | Lower medium investment-grade |
| BB | Non-investment grade — junk bond |
| B | Highly speculative junk bond |
| CCC | Extremely speculative junk bond |
| CC | Junk bond with substantial risks |
| C | Junk bond with a high likelihood of default |
| D | Default imminent, with little prospect of recovery |
The coupon rate
The interest your company pays bondholders each year. It follows from the bond’s term length and its credit rating — a longer term and a lower rating both raise it, and with it your interest burden.
In the example above the company raised $10 million on 5-year bonds at a coupon rate of 5.5%, and $20 million on 10-year bonds at 6.5%.
The bond market
As an investor you can buy and sell bonds issued by other companies on the secondary market. Select Bond Market from the Information Center, or press Ctrl-B.
With the City Economic Simulation DLC enabled you can also buy municipal bonds issued by city governments. Buttons at the top of the interface filter the list to corporate bonds, municipal bonds, or both.
What to watch when trading
| Figure | What moves it |
|---|---|
| Credit rating | The bond’s current rating. |
| Price | What investors will pay. It moves with the central bank’s interest rate and with the issuer’s rating — better finances lift the rating and the price, worse finances pull both down. |
| Yield to maturity | The effective return, which depends on what you paid. Buy at $90 a bond issued at $100 and your total return exceeds the coupon rate, because the purchase cost was lower. |
A central bank rate hike hits the whole market. Virtually every bond falls in price, because investors then demand higher interest from bonds in general.
You can hold a bond to maturity and collect its interest payments, or trade on the market for quicker profits.
Viewing a corporation’s issued bonds
The Bonds and Loans page on the Corporation Details screen lists them.
Buying back your own bonds
A company can buy its own bonds back from the secondary market, cutting its interest payments. That is most attractive when the bond price has fallen well below the issue price and the company has liquidity to spare.
The Out of Cash screen
Issuing bonds is now among the options offered when your company runs out of cash.
Bond redemption
At maturity the issuer must redeem its bonds. A company without the cash to do so has to raise it another way — new bank loans, or selling assets.
Bond default
A default happens when the company behind the bond goes bankrupt. Its bondholders can lose everything.
