3.2 Issuance Volume of Corporate Bonds in Billions of Dollars
Source: Securities Industry and Financial Markets Association (SIFMA) (2019).
This table shows the yearly issuance volume of various corporate bonds in billions of dollars between 2014 and 2018.
| Security | 2018 | 2017 | 2016 | 2015 | 2014 |
| Investment grade | 1165.1 | 1368.2 | 1290.3 | 1232.9 | 1124.3 |
| High yield | 173.0 | 284.2 | 237.3 | 261.9 | 314.1 |
| Callable – fixed rate | 816.8 | 989.7 | 1020.6 | 997.2 | 863.8 |
| Callable – floating rate | 146.9 | 147.6 | 32.7 | 30.7 | 21.5 |
| Non-callable – fixed rate | 265.0 | 391.0 | 389.9 | 383.9 | 425.9 |
| Non-callable – floating rate | 109.5 | 124.2 | 84.3 | 83.0 | 127.2 |
| Convertible | 38.6 | 27.2 | 22.4 | 20.7 | 37.2 |
| Total corporate bond issuance | 1376.7 | 1679.6 | 1550.0 | 1515.5 | 1475.6 |
Note: SIFMA collects information from Bloomberg, Dealogic, Thomson Reuters Eikon SDC, the U.S. Treasury, Fannie Mae, Freddie Mac, Ginnie Mae, Farmer Mac, Farm Credit, and the FHLB in determining the volume of bonds issued over a stated period.
As Tables 3.1 and 3.2 show, the volume of corporate bonds issued is much greater than the issuance of corporate equity. The majority of equity issues are common stocks, with 92.4 percent of the equity issued in 2018. Secondary or follow-on offerings of previously issued shares totaled 74.5 percent of the equity issued in 2018.
As Table 3.2 shows, the largest volume of bond issuance involves investment-grade bonds, accounting for 84.6 percent of the corporate bonds issued in 2018. Convertible bonds, which can be exchanged for the issuing firm's stock, amounted to only 2.8 percent of the total bond issuance in 2018. The differing maturity characteristics for equity and debt issues are substantial. Unlike debt issues such as bonds, equity investments have no maturity date, and thus the issuing firms have no obligation to repurchase them from investors. Therefore, for investors who want to sell shares of stocks, having an actively traded secondary market is crucial.
Except in the case of a firm choosing to repurchase shares or retire debt issues before maturity, neither buyers nor sellers of an issue are issuing firms. In the primary market, however, the seller is the issuing firm. Investors who want to buy a firm's securities when a primary offering is not extended must go to the secondary market to purchase the securities from another investor. Only a small number of investors participate in the primary market; most stock transactions occur in the secondary market. Trading in the secondary market sets the market price or value per share. A firm's management should theoretically try to maximize the market value of its shares. Therefore, a good secondary market is necessary for all marketable securities, not just stocks.
THE EQUITY MARKET AND THE ECONOMY
The equity market is important to the economy for several reasons.
Source of funding. Stock markets provide a source of funding for business entities. When companies enter equity markets to issue new shares, they often cite “investment needs” as the reason for their new issues. In such cases, by selling equity (ownership) to incoming stockholders, firms obtain funding for their current and future business developments.
Facility for allocating money. The equity market provides a great facility for allocating a scarce resource – money. In a well-functioning financial market, companies with the best performance and investment potential are likely receiving greater access to funding.
Imagine that investors face two stock investment options: Company A and Company B. Company A has outperformed the general equity market for the past 10 years and has a full pipeline of innovative projects and investments. Company B has underperformed the market for the past 10 years and has limited future potential. Of the two alternatives, most equity investors would choose Company A. This situation means that in equilibrium, Company A would receive more funding for the promising investment projects in its future. In contrast, the managers at Company B are likely to find obtaining funds both more difficult and expensive. Money flows to Company A because investors consider it a better alternative for obtaining future returns than Company B. However, in the real world, the choice is not just between Company A or B. Instead, the market provides investors with a wide array of other investments, allowing the allocation of funds to the industries, sectors, and businesses that investors find to be most appealing.
A way to send signals. Equity markets send credible signals to the marketplace, which have real effects on a country's economy. If the economy is booming, most companies are likely to enjoy higher profits and cash flows. Because stock prices are forward-looking, future profits and cash flows that do better than expected generally increase a firm's stock price. The reason is that investors perceive that these firms are more likely to provide dividends and/or capital gains in the future. If the market perceives that a firm's performance may falter, resulting in lower earnings, its stock price generally falls.
As a result, market signals indicating stock performance are important to the financial market are thus also considered reliable economic indicators. Through their ongoing trades in the secondary market, investors reveal and produce information about their expectations of the future profitability of alternative investment opportunities. This information is likely to be reflected in market prices; if more investors like a stock, its price tends to increase.
Similarly, if a stock is not favored, its price typically
