What are corporate bonds? Classification & Issuance Process
What are corporate bonds? Let’s explore their role, classification, and issuance process in business and investment. Corporate bonds are a common term in capital raising and financial management. They offer attractive investment opportunities, creating a connection between businesses and the financial market. In this article, let’s find out more with 1Office!
Mục lục
- 1. What are corporate bonds?
- 2. Types of corporate bonds in Vietnam
- 3. Characteristics of corporate bonds
- 4. Benefits for businesses when issuing bonds
- 5. The bond issuance process for businesses
- 6. Principles of issuing and using bond capital
- 7. Differentiating Corporate Bonds from: Government Bonds, Stocks, and Deposits
- 8. Risks of investing in and issuing corporate bonds
1. What are corporate bonds?
Corporate bonds are a type of financial instrument issued by businesses in the form of debt entries or certificates, and are often used to raise capital from investors. This is a debt contract between the bond-issuing company and the bond-buying investors, in which the company commits to repaying the borrowed amount (principal) along with interest over a specified period.
2. Types of corporate bonds in Vietnam
Corporate bonds can be divided into two main types: listed bonds and OTC bonds, depending on whether the bond has been listed on an official stock market (exchange).
- Listed bonds: These are bonds that have been listed on official stock exchanges in Vietnam, specifically the Ho Chi Minh Stock Exchange (HOSE), Hanoi Stock Exchange (HNX), and Unlisted Public Company Market (UPCoM). Listed bonds have clear regulations on trading, and financial information must be disclosed periodically.
- Unlisted bonds (OTC bonds): Also known as decentralized bonds, they are not listed on stock exchanges but are traded on the over-the-counter (OTC) market. These bonds often do not disclose financial information, and their trading is not as public as that of listed bonds. They are traded between investors and the issuing company and are not bound by legal policies.
In addition to the two types above, there can be other forms such as convertible bonds, non-convertible bonds, term bonds, and perpetual bonds, depending on the conditions and requirements of each issuing company.
3. Characteristics of corporate bonds
Understanding the characteristics of corporate bonds is very important for both investors and the issuing company. It helps optimize investment decisions, manage business risks, and ensure the efficiency and safety of bond transactions.
| Criteria | Characteristics of Corporate Bonds |
| Bond Term | – The period during which the bond’s principal and interest must be repaid, which depends on the company’s capital needs. – These can be short-term (under 1 year), medium-term (1 to 5 years), or long-term (over 5 years) bonds. |
| Bond Issuance Volume | – The total number of bonds issued by the company or the total value of bonds available for purchase. – This volume depends on capital needs and the market’s fundraising capacity. |
| Bond Issuance Currency | – The currency in which the bond is issued and used for principal and interest payments. – This is typically the national currency and is based on the regulations of the issuing market (e.g., VND for Vietnam, USD for the United States,…). |
| Bond Par Value | – This is the principal value of each bond, typically the amount the company must repay at maturity. – In Vietnam, the par value of a bond is a multiple of 100,000 VND, while in other countries, it depends on the regulations of the issuing market. |
| Bond Issuance Method | – The method by which a company issues bonds can be through a Private Placement or a Public Offering. – It can be in the form of book entries, certificates, or electronic data, depending on the company’s decision. |
| Bond Nominal Interest Rate | – Calculated based on the bond’s par value and must be appropriate for the company’s financial situation and ability to service the bond debt, while also complying with the State Bank’s interest rate regulations. – The nominal interest rate for corporate bonds can be determined as a floating rate, a fixed rate, or a combination of both. |
| Type of Bond | – Fixed-Rate Bonds with a fixed interest rate – Floating-Rate Bonds with an interest rate that changes according to a specific index – Convertible Bonds that can be converted into shares of the issuing company. |
| Bondholder Rights | The rights enjoyed by bondholders include receiving interest payments, demanding principal repayment at maturity, and other rights specified in the issuance documents, such as transfer, inheritance, etc. |
Analysis of corporate bond characteristics
4. Benefits for businesses when issuing bonds
Note that bonds can carry significant payment risks if the issuing company is facing financial difficulties. However, in general, this form is still preferred by many businesses because it offers numerous benefits compared to other methods:
- Higher interest rates than savings: The interest rate on corporate bonds is higher than the interest rate on bank savings or savings accounts. This makes bonds a worthwhile investment with better returns.
- Lower risk than stocks: In the event of a company’s bankruptcy, bondholders are prioritized to receive payment before shareholders, which helps reduce financial risk for investors.
- Tradable: Bonds can be bought and sold on the secondary market. This means investors can sell their bonds before they mature.
- Periodic interest payments: Bonds typically have a regular interest payment schedule (usually monthly or annually), allowing investors to receive periodic interest that they can use or reinvest.
- Potential for capital appreciation: If the bond’s price rises above its par value, investors can sell the bond for more than its face value, thereby generating a profit from the increase in the bond’s value.
- Expand international financial opportunities: Businesses can issue bonds on international markets, attracting international investors and expanding global financial opportunities.
- Manage financial risks: Bonds with fixed interest rates and specific terms help businesses manage potential financial risks, making it easier to forecast and plan finances.
>> See also: Smart capital raising methods to build a strong financial foundation
5. The bond issuance process for businesses
Step 1: Determine the need to issue bonds
The business needs to determine why it needs to issue bonds (the purpose of issuance). This could be to raise capital for expansion projects, restructure debt, invest in infrastructure, financial instruments, or other objectives.
Step 2: Prepare a financial plan
In this step, the business needs to create a detailed and feasible financial plan to determine the quantity and value of the bonds to be issued. This includes considering the term, interest rate, and repayment period. This plan must align with the company’s long-term financial goals.
Step 3: Select the type of bond
The business must decide on the type of bond that suits its financial objectives. Some common types of bonds today include fixed-rate bonds, floating-rate bonds, and convertible bonds (which can be converted into shares of the issuing company)… The choice of the appropriate bond type must be based on the company’s financial goals and future repayment capacity.
Step 4: Prepare legal documents
This is a crucial step in the bond issuance process. The business must prepare legal documents related to the bond issuance, including the offering circular, bond indenture, and other related documents. All these documents must comply with legal regulations and be thoroughly reviewed by a lawyer or financial expert.
Step 5: Work with a financial advisory firm
The business can collaborate with financial advisory firms to assist in the bond issuance process. Financial experts can help the company determine the bond structure, assess financial risks, and find potential investors.
Step 6: Registration and approval
After the documents are prepared, it is necessary to register and seek approval for the bond issuance from the financial regulatory authority or the stock exchange (if applicable). The approval process requires a certain amount of time, and the documents must be strictly compliant.
Step 7: Issuance and marketing
After the bond issuance is approved, the business should develop marketing strategies for potential investors. This marketing includes advertising the bonds and presenting the benefits of investing in the company’s bonds. The company can use banks or financial institutions to assist with marketing.
Step 8: Bond management
The business needs to manage its bonds closely, ensuring timely payment of interest and principal according to the established repayment schedule. Bond management at this stage also requires attention and regulatory compliance.
Step 9: Payment of interest and principal
Throughout the maturity period, the business must pay interest and principal to investors according to the established repayment schedule. This must be done on time to maintain the company’s financial reputation and credibility.
6. Principles of issuing and using bond capital
When issuing and using bond capital, businesses must comply with the regulations based on Article 5 of Decree 153/2020/ND-CP and Clause 2, Clause 3, Article 1 of Decree 65/2022/ND-CP, specifically:
- The bond-issuing enterprise is solely responsible for the use of bond capital and ensuring its ability to repay the debt.
- The enterprise must clearly state the specific purpose of the bond issuance, including implementing investment programs, projects, or restructuring debt. The use of bond capital must adhere to the purpose disclosed to investors and comply with the law.
- For green bonds, the capital from the bond issuance must be accounted for, managed, and disbursed for projects related to environmental protection or that provide environmental benefits.
- To change the terms and conditions of bonds issued in the domestic market, the enterprise must meet the following conditions: approval from the enterprise’s competent authority and consent from investors holding at least 65% of the total outstanding bonds of the same type.
- The bond-issuing enterprise must disclose information related to changes in the bond’s terms and conditions to ensure information transparency for investors.
7. Differentiating Corporate Bonds from: Government Bonds, Stocks, and Deposits
Comparing corporate bonds and government bonds
Below is a comparison table between corporate bonds and government bonds based on several criteria: issuer, purpose, interest rate, and issuance term:
| Criteria | Corporate Bonds | Government Bonds |
| Issuer | Private enterprises or companies. | The government, the state (such as banks, treasuries, ministry of finance…) |
| Issuance Purpose | To raise capital for business, expand strategic objectives, solve financial problems, etc. | To raise capital for the budget, cover temporary financial shortfalls. |
| Source of Funds | From investors and the market. | From the public and the market. |
| Interest Rate | Fixed or floating depending on the enterprise and usually has a higher interest rate than government bonds. | Usually fixed and has a lower interest rate, so it is considered a safe asset. |
| Term | Fixed short-term period, ranging from 1 to 3 years. | Medium or long-term, ranging from 5 to 30 years. |
| Convertibility to stocks (convertible bonds) | Can be converted to stocks. | Cannot be converted to stocks. |
| Capital Preservation | Relative | Almost absolute |
| Financial Risk | Mainly depends on the ability to repay debt, so the enterprise must manage and be responsible for the risk itself. | Is a safe source of credit with a lower risk level because it is influenced by the exchange rate. |
Table distinguishing corporate bonds from government bonds
Comparing corporate bonds with stocks and deposits
The choice between corporate bonds, stocks, and deposits depends on the investor’s goals, investment horizon, risk tolerance, and desired returns. Corporate bonds are a debt instrument, while stocks represent a portion of ownership in a company, and deposits are cash placed in a bank. Below is a comparison table of these three forms:
| Criteria | Corporate Bonds | Stocks | Deposits |
| Asset Type | A debt instrument that the issuer must repay | A portion of ownership in a company | A type of cash deposited in a bank |
| Investor’s Role | Bondholder | Shareholder | Depositor |
| Interest Rate | Interest rate is known in advance, usually higher than stocks and deposits | Interest rate can change depending on stock price fluctuations | Lower interest rate, usually fixed and known in advance |
| Term | Fixed, can be short-term or long-term | No fixed term | Usually under 1 year and can be withdrawn at any time |
| Capital Preservation Ability | Medium | Low | High |
| Transferability | Yes | High | Low |
| Investment Withdrawal Method | Receive periodic interest and principal at maturity | Sell stocks on the secondary market | Receive principal and interest at maturity |
| Risk | Failure to repay the debt by the due date | Stock fluctuations and depreciation on the stock market | Lower risk due to protection by banks and the government (except in case of bank bankruptcy) |
| Flexibility | Less flexible, capital must be held until maturity. | Flexible, can be sold at any time. | Flexible, can be withdrawn at any time. |
Table distinguishing corporate bonds from stocks and deposits
8. Risks of investing in and issuing corporate bonds
Although corporate bonds are considered an effective and attractive capital-raising channel, both investors and issuing companies face many potential risks. Understanding these risks helps balance profit opportunities with safety levels, leading to smarter investment decisions.
8.1. Credit Risk
This is the biggest risk—it occurs when a company is unable to pay the principal and interest on time. The cause can stem from declining business operations, weak cash flow, or poor financial management. In such cases, investors not only lose profits but also risk losing their capital.
Example: A company issues bonds to expand a project but fails to achieve the expected revenue, leading to an inability to repay the debt.
8.2. Liquidity Risk
Corporate bonds in Vietnam often lack a vibrant secondary market, making it difficult for investors to sell them when they need cash urgently. Finding a buyer or transferring ownership can be time-consuming, and may even require selling at a loss to withdraw capital early.
Common scenario: Privately placed bonds are often subject to transfer restrictions within the first year, causing difficulties for individual investors.
8.3. Interest Rate and Market Risk
When market interest rates rise, the value of existing bonds (with lower fixed interest rates) will decrease. This directly affects the expected return for investors if they need to sell the bond before maturity. Additionally, macroeconomic fluctuations (inflation, monetary policy, exchange rates) can also reduce the appeal of corporate bonds.
8.4. Legal and Information Transparency Risk
Some companies do not fully comply with information disclosure regulations, or lack transparency regarding their finances and the purpose of capital use. Investors may face risks if information is concealed or misrepresented.
Example: Bonds are issued to “roll over debt” instead of investing in new projects—this practice increases the risk of default.
