Who issues bonds, and why borrow instead of selling shares?

Bonds exist because somebody needs money for a long time and would rather owe it than share ownership of what they build with it. Understanding the borrower's motive tells you a surprising amount about the bond you end up holding.

Governments: the structural borrower

A government spends more than it taxes in most years. The difference — the deficit — has to be funded, and it is funded by selling bonds. On top of that, old bonds keep maturing and must be repaid, usually by issuing new ones. That's refinancing, and it means a large state is in the bond market continuously, on a published calendar, whether it wants to be or not.

Governments cannot sell shares in themselves. Borrowing is the only market financing they have. This is why government bonds are the deepest, most liquid corner of finance: the supply is enormous, regular, and standardised.

Companies: a choice between two kinds of money

A company that needs $500 million for a new plant has two broad routes.

Sell shares (equity). Money arrives and never has to be repaid. But existing owners are diluted — their slice of every future profit shrinks permanently. If the plant is a triumph, the new shareholders capture part of that triumph forever.

Sell bonds (debt). The company promises a fixed schedule of payments. The cost is known in advance and capped: pay the coupons, repay the principal, and the lenders go away. Every cent of upside from the plant stays with the existing owners. In most jurisdictions the interest is also tax-deductible, which lowers the effective cost further.

The trade-off is symmetric and unforgiving. Debt payments are obligations, not preferences. A bad year does not pause them. Miss them and you are in default, and control of the company can pass to creditors. Equity is expensive and forgiving; debt is cheap and rigid.

Why a bond rather than a bank loan?

This question separates people who have read about bonds from people who understand them. A company can just borrow from a bank. Sometimes it does. Bonds win when:

• The amount is large. A single bank may not want $500 million of exposure to one borrower. A bond spreads it across hundreds of lenders.
• The term is long. Banks are cautious about 10- and 30-year fixed-rate lending. Bond buyers — the pension funds and insurers of Unit 4 — actively want it.
• The rate should be fixed and locked. A bond fixes the cost for a decade at issue.
• The borrower wants no bank in the room. Bank loans come with tight covenants and a relationship manager reviewing your quarterly numbers. Bonds are typically looser.

A worked comparison

Northwind Industries needs $500 million for 10 years.

• Equity route: issue new shares. Suppose that hands roughly 15% of the company to new owners. If Northwind earns $200 million a year in a decade's time, about $30 million of annual profit is permanently redirected away from existing shareholders.
• Bond route: issue $500 million of 10-year bonds at a 5% coupon. Cost: $25 million a year in interest, plus $500 million repaid in year ten. Ownership unchanged. Total interest over the life: $250 million, known on day one.

Neither is "better" — that depends on the company's cash-flow stability, its existing debt, and how confident its owners are. What the comparison shows is the shape of the decision: a known, capped, compulsory cost versus an unknown, uncapped, permanent share of success. That is why companies of the same size make opposite choices, and why we describe those choices rather than grade them.

Try it now

1. Below is one large borrower's newest balance sheet, Verizon's. Divide its long-term debt by its shareholders' equity from the same year. That single ratio tells you how the company chose to answer this lesson's question.

2. Now find interest expense in the same company's income statement, below. That is the annual cost of the bond route as the accounts report it — an accrual figure that can include amortised discount and non-bond debt, not the cash actually paid, which the cash-flow statement records separately.

3. In one neutral sentence, describe the mix: "this company funds itself roughly X% with borrowed money." An observation about capital structure — not a verdict on it.