What Is a Bond Float?
4 OCT 2017
Bond float is a British way to say bond issuance. Corporations and governments float bonds to borrow money. Bonds are debts. They pay interest and repay their face values at maturity. Bonds are floated in a few different ways, depending on the issuer and type of bond.
1 Treasury Auctions
The U.S. Treasury floats bonds and other debt instruments through auctions. In 2012, the Treasury conducted 264 public auctions that floated $7.9 trillion of debt. An auction begins with a Treasury announcement describing the type and amount of security offered and relevant dates, terms and conditions. Buyers submit competitive bids or noncompetitive ones. The Treasury floats the bonds at the highest accepted competitive bid price, allocating shares to the highest bidders first. Noncompetitive bidders pay the same price, but they can't purchase amounts exceeding $5 million per auction.
2 Corporate Bond Syndicates
Corporations must register bonds with the U.S. Securities and Exchange Commission before publicly floating the bonds. Once the bonds are registered, the issuer works with an underwriter, typically an investment bank, to offer the bonds to the public. The underwriter forms a syndicate with other banks and brokers to buy up the bonds. The syndicate sells the bonds to the public for a higher price than it pays to the issuer, thereby securing its profit. Syndicates might not pre-buy the bonds of smaller companies but rather sell the bonds on a “best efforts” basis for a fee; if investors can't be found, the corporation receives less money than expected.
3 Municipal Bonds
State and local governments float municipal bonds that may be exempt from federal and state income tax. Issuers can use a syndicate, a single underwriter or an auction to float the bonds. Internet auction sites allow the public to place bids on some municipal and corporate bond floats. Government and municipal bonds don’t require registration with the SEC. Some municipalities offer insured bonds to help increase the size of the float or to lower the interest rate required to sell the bonds.
4 Private Bonds
A corporation can issue private bonds that are exempt from SEC registration. Corporations float these bonds through private placements to wealthy investors and to institutions such as pension plans. However, a new method, known as crowdfunding, will become available once the SEC finishes making rules for this investment practice. Crowdfunding allows small businesses and startups to issue up to $1 million of private securities each year to the public through web portals. These securities can be equity or bonds.