Continuous Bond
| Continuous Bond |
|---|
| See also |
Continuous bond belongs to the category of custom bonds. It is mostly used in United States of America for international trade and means a financial guarantee that renews automatically until someone cancels it. Continuous bonds never expires. When contractor or client makes his payments, continuous bond renewals. It ensures every transaction in a certain period ("Custom Bulletin and Decisions", 2003, page 13).
Two types of customs bonds
Customs bond is a "legal instrument designed to secure payment of a possible liability that arises from failure by an importer to adhere to United States trade laws and regulations affecting imported merchandise". .It is a government bonds, issued by them, that allows a company or single person to import goods within a world. We can list two types of customs bonds: Single-transaction bonds and continuous bonds (Bhala R., 2012, page 199/200).
Single-transaction and term bonds
These are contrasting types of bonds that are available next to continuous bonds:
- Traditional, term bonds: term bond, in contrast to continuous bond, has its maturity or expiration date.
- Single transaction: they are taken once in a time, and payment is made for only one single arrival or transaction.
It is an alternative for continuous bonds when a company or person does not want to invest in a long-time continuous bond ("Custom Bulletin and Decisions", 2003, page 13).
How continuous bonds works and its pros
Usually, continuous bonds are taken for a period of 1 year. There are three sides involved in process of continuous bond:
- Guarantor (Surety company): it agrees to make payments for any liability, that might happens when the bond principal (importer) do not perform his obligations.
- Importer,
- Beneficiary, which is CBP (Customs and Border Protection).
Continuous bonds are more profitable than single transactions. You pay once for continuous once in a year, and you are not limited to transactions, when in single-transactions you are obligated to pay for every single trade. Including that usually a company makes a lot of trades over year, continuous bond is cheaper than paying for every time transaction occurs (Bhala R., 2012, page 199/200).
Examples of Continuous Bond
- Government Bonds: Government bonds are debt securities issued by a national government to finance public spending. These bonds are typically issued in denominations and maturities that vary according to the country's economic needs and market conditions. Examples of government bonds include U.S. Treasury bonds, Japanese government bonds (JGBs), and German government bonds (Bunds).
- Municipal Bonds: Municipal bonds are debt securities issued by local governments, such as cities, counties, and school districts, to finance public projects. These bonds are typically issued in denominations and maturities that vary according to the issuer's financial needs. Examples of municipal bonds include general obligation bonds, revenue bonds, and special assessment bonds.
- Corporate Bonds: Corporate bonds are debt securities issued by companies to finance their operations. These bonds are typically issued in denominations and maturities that vary according to the issuer's needs and market conditions. Examples of corporate bonds include investment grade bonds, high yield bonds, and convertible bonds.
Advantages of Continuous Bond
Continuous bonds are a type of bond with no maturity date, offering investors many advantages. These include:
- Continuous bonds have no maturity date, so investors don't have to worry about when the bond will expire. This allows investors to keep their investment for as long as they want, giving them the flexibility to adjust their investments to changes in the market.
- Continuous bonds often have higher coupon rates than other bonds, providing investors with a steady and reliable income stream.
- Continuous bonds are generally less volatile than other bonds, as they are not subject to the same market forces that may drive prices up or down quickly.
- Continuous bonds can help diversify an investor's portfolio and reduce risk by offering a steady, predictable return.
- The interest payments on continuous bonds are typically paid out on a regular basis, allowing investors to plan and budget their cash flow.
Limitations of Continuous Bond
One of the limitations of continuous bond issuance is that it can be difficult to manage and control. *It requires a high degree of liquidity, which can be difficult to maintain in times of market volatility. *It also is not suitable for large-scale financing as the costs associated with such a system can be prohibitive. *The lack of maturity date also means that the issuer cannot choose to redeem the security early if they wish to, thus limiting their ability to take advantage of market opportunities. *The issuer also has to maintain an accurate record of all the bondholders, which can be a challenge as the number of holders grows. *Finally, the issuer must be prepared to pay out the interest payments on a regular basis as there is no maturity date and no closing of the market.
Continuous Bond is a method of valuing a bond associated with the principles of time value of money. It also involves forecasting future interest rates and cash flows to determine the fair market value of a bond. Other approaches related to Continuous Bond are:
- Zero-coupon bond: A zero-coupon bond is a bond that does not make any coupon payments until it matures. This bond is discounted based on the yield to maturity.
- Discounted Cash Flow (DCF) Analysis: This approach involves forecasting the future cash flows of the bond and then discounting them back to the present value. This helps to determine the fair market value of the bond.
- Yield to Maturity (YTM): YTM is used to calculate the return of a bond if it is held to maturity. It takes into account the current market price, the face value and the coupon payments of the bond to calculate the YTM.
In summary, Continuous Bond is a method of valuing a bond associated with the principles of time value of money. Other approaches related to Continuous Bond include Zero-coupon Bond, Discounted Cash Flow Analysis, and Yield to Maturity.
References
- Bhala R., (2012), Dictionary of International Trade Law, Second Edition, "Associate Dean for International and Comparative Law & Rice Distinguished Professor", Matthew Bender & Company Inc., Canada
- Custom Bulletin and Decisions, Vol. 37, (2003), "Weekly Compilation of Decisions, Rulings, Regulations, Notices, and Abstracts Concerning Customs and Related Matters of the Bureau of Customs and Border Protection", U.S. Court of Appeals for the Federal Circuit and U.S. Court of International Trade, United States of America
- Horn H., Mavroidis C.P., (2010), The WTO Case Law of 2008, "Legal And Economic Analysis", Cambridge University Press, United States of America
- Office of the Federal Register, (2013), Code of Federal Regulations, Office of the Federal Register, United States of America
- World Trade Organization, (2008), Dispute Settlement Reports, Volume VIII: Pages 2771 to 3176, "Dispute Settlement Reports", Cambridge University Press, United States of America
Author: Mateusz Paduch
