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Marketing to Bond (Fixed-Income) Leaders in Investment Banking

Understanding Their Role

Companies can raise money by selling stock shares, or equity, in the company. When someone buys stock they become a part-owner of the company, and they assume the risk that they may lose some or all of the money they invested if the company performs poorly. Another way companies raise money is by issuing bonds. When an organization issues bonds, they receive needed money and in return agree to pay investors an agreed interest rate over a fixed term before repaying the initial investment. The interest paid by the bond is called a coupon (not to be confused with the yield); the term over which interest is paid is the bond's duration; and the amount that is repaid at the end of the bond's maturity is called a principle. As is the case with shares, bonds can be traded on the open market.1


The bond business (also called fixed income) can be very lucrative for investment banks. The value of bonds issued annually reached over $1 trillion for the first time in 2006. Investment banks make money issuing all of these bonds through the “underwriting spread”. The underwriting spread (or gross spread) is the difference between the price paid by the buyers and the proceeds to the company. The gross spread is generally less than 1 percent for high-quality issues.2


Corporations are not the only entities that issue bonds. The U.S. government spends more money than it receives in tax revenue. To make up for this shortfall (the federal deficit), the government sells financial instruments with the promise to pay back the money at a future date. Issuance of U.S. Treasury securities has continued to surge in recent years. From 2002 to 2007, the government raised cash in the range of $150 billion to $370 billion. The amount of cash raised surged to $1.24 trillion and $1.35 trillion in 2008 and 2009 during the global financial crisis to stimulate the economy.3


Bonds from the U.S. Treasury are very popular because they are considered the “safest” investment in the world. Although the returns from these investments are relatively low, the investor is certain to receive the returns they are owed because of the stability of the U.S. government. States and local governments (such as cities or counties) also issue bonds known as municipal bonds. These bonds are often issued for a specific purpose, such as building schools or an airport. These bonds are similar to federal bonds in that they pay a low rate of interest. The advantage of municipal bonds is interest earned on these investments is not taxable at the federal level, making them attractive to investors.

“[Goldman Sachs] provided its total revenue from fixed-income trading, which produced a Wall Street record $21.9 billion in 2009 and declined to $8.46 billion [in 2015]. Goldman Sachs has cut compensation costs and relied more on investment banking and asset management to combat the decline, and the bank said…it can boost revenue as competitors exit businesses and clients pay more for liquidity.” - Bloomberg Business4

1 THEUNISSEN, GARTH. “Bonds for Beginners.” Finweek, 2014, 44 – 45. EBSCOhost(95842432).

2 Ibid

3 Ibid

4 Moore, Michael J. “Goldman Sachs Gives Breakdown of Fixed-Income Trading Revenue.” Bloomberg Business. February 2015. Accessed 11/20/15, available at: www.bloomberg.com/news/articles/2015-02-10/goldman-sachs-gives-breakdown-of-fixed-income-trading-revenue


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Bonds are a means for companies and governments to raise money from investors. Investors do not receive any ownership shares in return for buying bonds, just an agreement from the company or government to repay the investment, plus a set interest rate. Investment banks make money on bonds by receiving a small percentage of the total money raised from investors.