Bond Issuance Before Bond Issuance

Bond Issuance

Before bond issuance became popular, Internet firms issued stocks to raise funds. Consider this scenario: Why wasn't bond issuance a popular choice among Internet companies during the late 1990s?

Traditionally, large corporations with deep financial pockets have preferred bond issuance as a strategy of raising capital, as opposed to small firms, which prefer using the sale of stocks. The majority of the Internet companies of the late 1990s were small companies, often begun by young entrepreneurs. Every cent was necessary to create the enterprise. Corporations "must make interest payments even when they are not showing profits," when they issue bonds, unlike stocks, where shareholders accept some risk that they may experience a loss on their initial investment ("How Corporations Raise Capital," U.S. Department of State, 2007). Most companies, especially experimental companies (a fair characterization of the Internet companies of the 1990s) experience a long, initial period of being 'in the red' when they are still generating interest in their product.

Also, if investors doubt a company's ability to meet its interest obligations, they will often shy away from buying bonds issued by a new company or will demand a higher rate of interest to compensate for the increased risk they are taking in buying the bonds of a company that could go bankrupt. Buyers of corporate bonds also tend to be more conservative investors than buyers of stocks, as these investors usually seek to sacrifice the potentially higher profits provided by stocks for the greater security provided by bongs ("Comparing Stocks, Bonds, and Cash Equivalents," American Funds, 2007). Bond-buyers are also traditionally older and might have been more leery about investing in a new technology such as the Internet during the 1990s.