In order to raise money, corporations, municipalities, and the U.S. government issue bonds. When you buy a bond, you are lending money to the issuer, who promises to pay you back the principal plus interest over a set period of time. The payments are usually semi-annual. Although bonds are debt instruments, they are often referred to as fixed-income securities because the issuer makes regular interest payments (fixed income) at a predetermined rate for the life of the bond (fixed term).
What is the SEC?
The Securities and Exchange Commission (SEC) was created by Congress to protect investors, maintain fair and orderly functioning markets, and facilitate capital formation.
The SEC is an independent federal agency that is responsible for administering federal securities laws. These laws are designed to promote full disclosure of information that might be important to investors, to prevent fraudulent and manipulative practices in the securities markets, and to protect investors who purchase securities.
In addition to its enforcement responsibilities, the SEC also has a broad regulatory authority over all aspects of the securities industry. This includes power to register and regulate securities exchanges, broker-dealers, investment advisers, and investment companies.
What are bonds?
Bonds are debt securities, similar to an IOU. When you buy a bond, you are lending money to the issuer, which can be the federal government, a municipality, a corporation, or a special-purpose entity. In return for the use of your money, the issuer agrees to pay you interest periodically (usually every six months), and to repay the principal—the amount of money you originally lent—when the bond matures (reaches its due date).
What are the benefits of bonds?
Bonds are a type of investment that can offer several potential benefits, including:
-Regular interest payments: When you invest in a bond, you typically receive regular interest payments (known as “coupons”) from the issuer. These payments can help to offset inflation and provide a source of income.
-Potential for capital appreciation: If the issuer’s financial condition improves, the value of your bond may increase, providing potential for capital appreciation.
-Diversification: Bonds can help to diversify your investment portfolio by adding a different asset class. This can potentially help to reduce overall risk.
When considering bonds as an investment, it is important to keep in mind that they also carry some risk, including credit risk (the risk that the issuer will not be able to make interest or principal payments) and interest rate risk (the risk that rising interest rates will decrease the value of your bond). It is important to research any bond before investing and to consult with a financial advisor to determine if bonds are right for you.
How are bonds regulated?
The primary regulator of bonds in the United States is the Securities and Exchange Commission (SEC). The SEC is a federal agency that was created in 1934 to protect investors from fraud and other illegal practices in the securities markets.
The SEC enforces the federal securities laws, which are designed to promote full disclosure of information about securities and to prevent fraud. The SEC requires bond issuers to disclose certain information about their bonds, including the terms of the bonds, the risks involved, and the financial condition of the issuer.
The SEC also regulates the brokers and dealers who sell bonds to investors. Brokers and dealers must register with the SEC, and they are subject to rules that prohibit them from misrepresenting information about securities, engaging in insider trading, or committing other fraudulent acts.
In addition to the SEC, some bonds are also regulated by state agencies. For example, many municipal bonds are regulated by state securities commissions.
What are the types of bonds?
Bonds are debt instruments that are used by companies, governments, and other organizations to raise capital. There are two main types of bonds: corporate bonds and government bonds.
Corporate bonds are issued by private companies in order to finance their operations. They are typically issued in denominations of $1,000 and have a maturity of more than one year. Interest on corporate bonds is paid semiannually.
Government bonds are issued by national governments in order to finance their operations. They are typically issued in denominations of $100 and have a maturity of more than one year. Interest on government bonds is paid semiannually.
See:2. how to invest in bonds.
What are the risks of bonds?
Bonds are often considered one of the safest investments. But even bonds have some risk, including:
-Interest rate risk. When interest rates go up, bond prices go down. That’s because new bonds are being issued at higher interest rates, so older bonds with lower interest rates are not as valuable.
-Inflation risk. Inflation reduces the purchasing power of your fixed interest payments. So even if the bond’s value doesn’t go down, you may end up losing money if inflation is high enough.
-Credit risk. This is the risk that the issuer will not be able to make scheduled interest payments or repay the bond when it matures. It is also called default risk.
-Reinvestment risk. This is the risk that you will have to reinvest your money at a lower interest rate when the bond matures and you get your principal back.
The SEC’s Division of Corporation Finance has issued new guidance to help companies assess whether their bonds are securities. The new guidance is in the form of questions and answers that cover when a bond is a security, how the bond market has changed, and what factors companies should consider when determining whether their bonds are securities.
The SEC’s guidance comes amid a shift in the bond market, with more companies issuing bonds that are not registered with the SEC. In recent years, the number of unregistered bonds has increased as companies have sought to take advantage of low interest rates and strong investor demand for income-producing investments.
The new guidance is intended to help companies assess whether their bonds are securities, and if so, whether they are required to register them with the SEC. The guidance also covers other key topics, including:
-What factors companies should consider when determining whether their bonds are securities.
-How the bond market has changed in recent years.
-What types of information investors should look for when considering investing in unregistered bonds.