Bonds can be sold by most financially-sound entities like the US Treasury, corporations, hospitals, universities and colleges, and governmental entities, like municipalities. The yield on the bond is based on both current interest rates and the issuer’s current financial strength and historical financial activities.
Most municipal bonds are issued by either states, political subdivisions, or a political authority. The issuer spends the proceeds based on a financing plan and is responsible for paying back the bond’s principal and interest payments using the funds they have assigned. The issuer is also responsible for meeting any parameters set forth in the bond’s documentation, such as annually increasing charges or continuing disclosure requirements. Credit rating agencies use the issuer’s financing record as part of the process to rate the bonds.
Alternatively, an issuer might function as a conduit issuer on behalf of a third party, called the conduit borrower, that is responsible should the loan default. This means that the conduit issuer issues the bonds to raise funds, but those funds are provided to a third party, such as a 501(c)(3) non-profit organization.
Examples of 501(c)(3) organizations include:
- Hospital organizations
- Charitable organizations
- Educational organizations
- Scientific organizations
Example:
When a state sells tax-exempt bonds in the capital markets, the state is the issuer and is responsible for the repayment of the bonds and for strictly obeying any rules set forth in the bond’s documentation.
What’s important here?
An issuer sells bonds in the capital markets to fund large capital expenditures. Once the bonds are sold, the issuer is responsible to meet any parameters set in the bond documentation until the bonds mature. The issuer is also responsible for the repayment of the bonds and any associated interest payments.
