Question

We see that Apple borrowed a total of about $7 billion at this time but divided it among 6 different bond issues. Why do borrowers offer many bond issues with different features and maturity dates?

Answer 1

Bonds are a form of debt for the company and the company is required to make periodical interest payments and repay the principal (amount borrowed) at the time of maturity to the lenders/bondholders. A company will issue bonds with different maturity dates to avoid making a lump sum repayment of the amount so borrowed. While the company is able to raise the entire amount at the same time, it can repay the principal amount as and when the underlying bond issues mature. This reduces the company's default risk as it is required to repay lesser amount of money at the time of maturity of bonds occurring on different dates. Such bond issues are termed as serial bonds.

A company can also issue callable bonds which provides bondholders with a call premium in case the company calls/retires the bonds before the actual maturity date. This feature allows the company to redeem the bonds which have earlier been issued at higher rates of interest. The company can take advantage of lower interest rates (that may be currently prevailing in the economy) by issuing fresh bonds.

Another feature that may be offered by the company is conversion of bonds into equity. Convertible bonds are generally issued with lower coupon rates and the conversion option is used to attract investors to buy the bonds (even when they carry lower interest rates as compared to the market). Again, with bonds, the company is able to deduct interest from its taxable income which in turn reduces its tax liability, thereby reducing its overall cost of capital. This wouldn't have been possible if the company had obtained money against the direct issue of equity to investors.

Bonds with detachable stock warrants may also be issued by the company to allow bondholders to purchase company's equity shares at a specified price while still holding their bonds. Again, the company would use this option to issue bonds at lower interest rates as compared to the market.

Companies with poor credit ratings/position may issue bonds with very high interest rates in order to attract investors. These companies carry high default risk and are generally preferred by investors/bondholders who have a very high risk appetite. Such bonds are often referred to as junk bonds.