The federal government, municipalities, and corporations issue bonds as a way of financing debt. When you invest in a bond, you become a creditor and the issuer is the debtor. The issuer agrees to make interest payments, known as coupons, and repay the principal—often referred to as the face value or par value—when the bond reaches its maturity date.
Alternate names: Tap sale, bond tap, additional placements, reopenings
With a tap sale, the issuer authorizes an issue of a bond, but then a portion of that issue is held back for future sales. Tap sales maximize flexibility for the borrowing entity. Issuers will often use this approach when they’re not certain about future financing needs. They can issue debt in tranches to obtain the most favorable financing terms based on current market conditions. Fixed-rate bonds and interest rates have an inverse relationship. When interest rates rise, the price of bonds drop. When rates fall, bond prices rise. The reason: If interest rates drop, existing bonds become more valuable because they yield more than bonds issued at the current rate. But if interest rates rise, the value of existing bonds drops because a newly issued bond pays a higher rate.
How Does a Tap Issue Work?
There’s no limit on the number of tap sales for issuers. Sometimes governments will issue hundreds of additional placements for bonds. A tap issue can take place via auction, which is common for government-issued bonds, or through the underwriting process. In some cases, new issues can be made using a different method than the original issue. The issuer can set a fixed price for the new bonds, or it can set a minimum and allow market conditions to dictate the price.
What It Means to Individual Investors
Tap issues are also common among governments of developing countries, where access to cash may be limited and demand for government-issued securities can be difficult to predict. The issuer can also avoid the legal and transaction expenses associated with issuing new bonds. You can find detailed information about the terms of a bond, including the bond’s purpose, when and how interest payments and repayment of principal will be made, and whether the issuer can redeem the bond before its maturity date on the bond’s prospectus.
