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Why should not the city of Houston issue a bond for 2 million dollar - Essay Example

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According to the Capital Markets Development Authority, bonds are one of the classes of investments that are called “fixed income securities” (1). They are in the same category as bills and notes. These are contracts wherein an investor lets a business borrow money with…
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Why should not the city of Houston issue a bond for 2 million dollar
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According to the Capital Markets Development ity, bonds are one of the es of investments that are called “fixed income securities They are in the same category as bills and notes. These are contracts wherein an investor lets a business borrow money with interest within a certain period of time. The interest is paid in uniform installments over the life of the bond called coupons. The bondholder gets a bond certificate which can also be sold to another investor. In this case, the city of Houston aims to be the Issuer of a two million dollar bond wherein investors can be bondholders so that they can pay the city coupons of interest from the two million dollars, making a profit for the city of Houston.
To make a profit as an alternative source of capital is just one advantage of issuing bonds. Aside from that, bonds can be used as Leverage; the coupons that are usually paid every three, six, or twelve months are a flexible way to make payments easier by making less payments fit the situation. Also, there is an option to create a fixed interest rate that is unaffected by changes.
Aside from being a benefit, there are also some risks and challenges when issuing bonds. Bonds are a form of debt. These debts are financial risks that leave the issuer (in this case, the city of Houston) payment obligations that are enforced by the law. They have to make these payments no matter what financial state they may be in. Compared to shares that may not be paid when it the issuer lacks money, these bonds can create financial problems for the issuer. There is also a refinancing risk wherein the issuer would need to get capital once bonds mature. This might be a problem if interest rates have been increasing, causing the issuer to possibly refinance at a higher rate. The large bullet payment of the principal at a bond’s maturity is a possibly large amount that may be difficult to pay if the principal payment is delayed. The administrative cost of handling the transactions can also be a burden, unlike a loan wherein the details are confidential; bond issuers have to disclose some details to the public as requirements by the CMD and other regulatory authorities. Bonds are also treated and taxed as income to the shareholder. To keep the bond attractive to bondholders, the issuer has to compensate for the taxes.
These are the reasons why Houston should not issue bonds. It is a risk and requires planning and manpower. The administrative cost has to be prepared before issuing the bonds; there has to be a failsafe to protect the city’s assets in case there is trouble financing, refinancing, or paying the principal, and disclosure of the financial affairs of the city as a requirement to releasing bonds might attract unwanted attention. Considering the following, there are other ways to generate funds for the city. Bonds are just one of the options that the city can consider. To issue bonds properly, the city must have good credit quality, must be of sufficient size as a business entity, must have a good financial record, a good public profile, must have stable earnings; they must not have high debts to pay, must have issue a large enough bond to be cost-effective, and they must be fine with public scrutiny as a business entity. All these are just general requirements to pull off an attractive, profitable, and manageable issuance of bonds.
Works Cited
Capital Markets Development Authority. A Guide to Issuing Bonds. Suva, FJ: CMDA, n.d. Print. Read More
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