"The Bond Issuer is a Major Factor"

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One important factor related to bonds is simply, who or what issued the bond?

Many different kinds of entities raise money through issuing bonds.

Who is the Bond Issuer?

Companies large and small. Local governments and federal government-related agencies. National governments from the United States to Paraguay.

One of the risks of investing in bonds is prepayment risk.

Look to the Creditworthiness of Bond Issuer

Obviously, one important way to judge prepayment risk is to look at who issued the bond

United States Treasury bonds are considered risk free because the U.S. government has always paid its debts. I'm sure that also applies to the governments of many other developed countries.

So long as governments are committed to paying off their obligations and have the taxing power to do so, they should repay their bonds.

Of course, not all governments around the world have this power. Some of them preside over extremely poor people, most of whom pay little or no taxes because they have little income. Most of these governments have little power to enforce their own tax laws.

Sometimes political factors enter in. I know I've heard at times that the current government of Iraq did not plan to honor debts incurred by Saddam Hussein. That may have changed. In 1998, Russia upset the world by announcing it would not repay Soviet Union-era debt (though it would honor post-Soviet debt.)

Businesses normally intend to pay off their bonds, but of course businesses can have cash flow problems and become unable to pay their bills. Therefore, the quality of the business issuing a bond has a great effect on how risky it is.

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