Understanding Debt Offerings: Bonds & Notes Explained

Purchasing a corporation's debt offering may pose less risk than purchasing its stock.

A debt offering is often referred to as a note or bond and is offered by a company to raise capital. The other method by which to raise funds is through the offering of stock, or equity. By using debt, as opposed to equity, the business does not dilute the ownership or income of the current shareholders. Bonds and notes each have a principal amount, a coupon payment, a stated interest rate and a maturity date. Some will have a provision for warrant options.

Principal

Every debt offering has a stated purchase price, or principal amount, also referred to as the par value of the note or bond. This is how much the investor is lending the company until the maturity date. On that date, the company will then repay the principal amount to the investor. Principal is usually declared in $1,000 increments.

Coupon Payments

Periodically throughout the life of the debt offering, the organization will make a payment to the investor for letting it borrow the capital. This is called the coupon payment, and it is based on the bond's stated interest rate. Payments are usually made semi-annually (twice a year) or quarterly. For example, if the stated interest rate of a $1,000 par value bond was 8 percent and it paid interest semi-annually, it would pay the investor $40 every six months until maturity.

Selling at a Discount or Premium

Many bonds or notes sell in the market at a discount or premium. After a person makes the initial purchase of the bond from a company, she can resell it to another investor if she chooses. Investors are not always willing to pay full price for the bond, or they may be willing to pay more, depending on several different risk factors, the coupon payment and other features of the debt offering.

Warrant Options

Many debt offerings come with warrant options, also called "equity kickers." This means that instead of paying back the principal, the company will redeem the bond for shares of its stock at a previously stated price. This can be beneficial if the stock price has risen higher than the price declared in the option. This may be one of the reasons for a bond or note to sell at a premium.