Tap Issue

What Is a Tap Issue?

A tap issue is a strategy that permits borrowers to sell bonds or other short-term debt instruments from past issues. The bonds are issued at their original face value, maturity, and coupon rate yet are sold at the current market price. A tap issue is likewise alluded to as a bond tap or tap sale.

How a Tap Issue Works

At the point when a bond is issued, it is made available in the public markets for lenders and investors to purchase. Notwithstanding, before a bond can be issued, it must be authorized by the issuer. In some cases, a portion or the full amount of the bond that is authorized is held back until the issuer needs the funds that the bond will give when sold. At the point when the bond is issued to the public sometime in the not too distant future, it is alluded to as a tap issue.

Tap issues, which assist with staying away from transaction and legal costs, are great for more modest raising support endeavors, where gathering pledges can be cost-restrictive.

Benefits of a Tap Issue

A tap issue is generally a government security, for example, a Treasury bill. The borrowing issuer declares the availability of the issue and acknowledges offers for a predefined time frame period. The issue is sold at a fixed price or at a cost dependent on the demand for the debt instrument. On the off chance that the price is fixed, the security's price won't see the value in the secondary market and, subsequently, the issuer will be stuck paying a higher yield than would somehow be needed.

With a tap issue, the borrowing governmental body issues bonds throughout some stretch of time, as opposed to in one auction sale. A tap issue permits the government to make the bond available to investors when market conditions are generally favorable. It is likewise an alluring mechanism for issuers as it accommodates opportune access to funds.

The bond tap is sold at the current market value on their issuance dates however issued under similar terms — face value, maturity date, coupon rate — as the initial series of bonds. Since the bond is priced at its market value, an issuer can offer the bonds at a premium to par in the event that the bonds are trading appealingly on the open market. Furthermore, since a premium bond has a lower yield compared to a discount bond, the borrowing issuer will be in a worthwhile position as it would be paying a lower return to investors.

Moreover, by offering a bond with similar terms as its initial series, the issuer can lock in covenants, redemption timetables, and interest payment dates.

Special Considerations

This method of giving extra debt was adopted by the British and French governments. Tap issues permit an organization to keep away from certain transactional or legal costs and facilitate gathering pledges. The issuer sidesteps a large number of the initial conventions encompassing a bond issue, for example, the prospectus, and proceeds to auction off the new securities. Giving on tap is frequently appropriate for more modest raising money endeavors, where the cost of another issue is too high when compared to the amount borrowed.

Highlights

• Numerous government securities use tap issues, for example, Treasury bills, which permit the government to make the bond available to investors when market conditions are generally favorable.
• A tap issue is the point at which a portion of a bond issue is held back after it is initially authorized and later made available to the public.
• A tap issue has a similar maturity date, face value, and coupon rate as the original issue yet is sold at the current market price.