Bonds and Risk
Amazon is the most established online e-commerce store in the world. The superstore has its headquarters in Seattle, Washington. Amazon boasts of a large internet enterprise that sells an array of products ranging from electronics, to books, housewares, toys, and streaming services. The company both sells directly to the final consumer and acts as an intermediary between retailers and the final consumer. Amazon owns the largest e-book platform in the world; Kindle. Amazon has revolutionized buying over the years. Conventionally, consumers had to make trips to physical stores and endure long queues to get their products. Amazon has made it more convenient and flexible for buyers by reducing the shopping experience to the click of a button. The company is one of the fastest growing Fortune 500 companies that ranked second to Walmart only as per the 2020 top 10 list (“Fortune 500 list of companies 2020,” 2020). Amazon started as a meager garage bookstore but has grown into the largest superstore in the globe. The company owns the supply chain and inventory of its merchandise, and it sells directly to the customers. Amazon has used debt funds to facilitate its growth over the years by using both bonds payable and low-risk government bonds. The use of bonds as a source of funds is a strategic move that will benefit the company in the long-term.
Amazon has invested in both bonds payable and bonds from another organization. The government bonds will be taken to be bonds in another organization in this case since the two share several similarities in this context. Amazon has used bonds payable to finance its acquisition of Whole Foods Market Inc. The company successfully raised $16 billion to finance the transaction that cost $13.7 billion (Linnane, 2017). The bond was a seven-part offering that comprised of a 40-year tranche and had three of U.S’s biggest banks as the underwriters. These are Goldman Sachs, the Bank of America Merrill Lynch, and J.P. Morgan Chase. This is just but one example of Amazon’s bond payables. Per Kim (2019), the company stacked up on low-risk government bonds and raised its holding of these bonds to an all-time high of $11.7 billion up from $6.8 billion in the previous year. Amazon’s government bonds of choice include Treasury notes, such as the two-year and ten-year treasury bonds and securities issued by government-sponsored entities, such as Freddie Mac and Fannie Mae.
Amazon’s choice to use bonds for financing or investment purposes is wise and advantageous. I support these decisions made and implemented by the superstore over the years. Corporate bonds are debt instruments issued by corporates in a bid to raise funds for expansion or starting the company/business. Both individuals and other corporates loan their money to the company, and in return, they receive interest on the bond and a full return of the bond’s full value on the maturity date. Corporate bonds have a fixed rate of interest as opposed to a variable rate. As such, the company benefits from having to adjust its cash outflows according to changes in interest rates and economic conditions. The company can plan, knowing that the interest payments will not change. The second advantage of corporate bonds is the preservation of shareholders’ value. Unlike shares that constitute a unit of ownership in a corporation, bonds do not give any ownership rights to the holder. Therefore, corporations prefer bonds for key company projects because shareholder value is maintained, and so are the dividend expenses.
The third advantage of corporate bonds is the retention of cash in the company to be used in other activities. The redemption dates of corporate bonds are usually far off, enabling corporates to access huge cash amounts before returning them. Government bonds, on the other hand, have two fundamental merits. First, they have a low-risk level compared to all other investments. The federal bonds in the U.S. are the safest investment with a risk level of hypothetically zero because the U.S. is the most stable economy in the world and has very low, almost negligible, chance of defaulting. Secondly, government bonds have a tax advantage over other investment types. Interest earned on these bonds is usually tax-exempted (“How government bonds are taxed,” n.d.). This exemption applies to both state and local income taxes. Although these bonds generate very low returns compared to stocks, their low-risk levels make them ideal for tough economic times. Amazon’s decision to invest in government bonds during the period marred by the U.S-China trade wars was a wise move as these trade wars adversely affected the price of tech firms and curtailed growth of multinational corporates. The company’s decision also came in handy with the biting effect of the COVID-19 pandemic on the U.S. economy. With investment indexes, such as the S&P 500, recording nearly 90% of stocks in correction levels, investing in government bonds was a good idea (Stevens, Fitzgerald & Melloy, 2020). The reasons mentioned above prove that Amazon’s decision to own corporate and government bonds was well informed.
Fortune 500 list of companies 2020. (2020, May 17). Fortune. Retrieved from: https://fortune.com/fortune500/
How government bonds are taxed. (n.d.). The Vanguard Group. Retrieved from: https://investor.vanguard.com/investing/taxes/government-bonds
Kim, E. (2019, February 14). Amazon loaded up on low-risk government bonds last year as investors dumped tech stocks. CNBC. Retrieved from: https://www.cnbc.com/2019/02/14/amazon-bought-us-government-debt-at-a-record-pace-last-year.html
Linnane, C. (2017, August 17). Why Amazon’s seven-part bond deal is a bargain. MarketWatch. Retrieved from: https://www.marketwatch.com/story/amazon-to-issue-up-to-16-billion-in-debt-to-fund-whole-foods-acquisition-2017-08-14
Stevens, P., Fitzgerald, M., & Melloy, J. (2020, February 27). Stock market live updates: Dow plunges 1,100, worst point drop in history, will fed act? CNBC. Retrieved from: https://www.cnbc.com/2020/02/27/stock-market-today-live.html