Abstract
In the countries with developed financial markets, unlike in Bosnia and Herzegovina (BiH) and other emerging market countries (EMCs) with the so called bank-centric financial systems, corporate bonds are a rather significant alternative to the usage of bank loans for financing the development needs of the real sector of the economy (corporate sector). The new architecture of world’s financial stability with Basel III as its integral part additionally emphasizes this importance for both banks and companies. Besides, in the countries with developed financial markets it is probably needless to mention the need for high quality debt securities. This is especially true due to the conditions of stronger institutional investors on the market, such as pension funds that can realistically be expected to become the leading financial institutions of the 21st century, and ever increasing need of institutional investors, funds in particular, for high quality forms of assets and portfolio diversification. In EMCs in which pension reforms have still not been completely implemented or completed, considering a drastic fall in the ratio of the insured based on contribution payment and the number of pensioners, the existing situation is almost non-sustainable. Therefore, the transformation of pension funds in accordance to the two or three pillar structure and the emergence of voluntary pension funds as financially powerful institutional investors have no alternative. Certainly, in terms of corporate bonds and their issue on the one hand, and investing in them on the other, in EMCs and thus also in BiH there are some important aspects to be observed when analyzing their influence on the decisions on financing or investing (liquidity, interest rate level, clarity and implementation of regulations, etc.).
Highlights
When a company decides to invest on a long-term basis, it can rely on usual sources of financing such as bank loans and/or proprietary capital or, as an alternative, it can raise the necessary funds by issuing bonds
It is an encouraging fact that the increasing demand of pension funds and limited volume of bank loans create the potential for growth of corporate bond markets in these countries
Pursuant to the Law on Security Market in Bosnia and Herzegovina (BiH) Federation and the Law on Security Market of Republic of Srpska banks are defined as institutional investors, which is why banks were included in the sample
Summary
When a company decides to invest on a long-term basis, it can rely on usual sources of financing such as bank loans and/or proprietary capital or, as an alternative, it can raise the necessary funds by issuing bonds. It is usual that corporate bonds give investors higher return rate than savings in banks or state issued bonds of similar maturity, due to the fact that corporate bonds are more risky (in accordance to the universally accepted investment rule “higher risk, higher return”). Development of large infrastructural projects vitally important for EMC’s economic growth is hard to imagine without capital. Choosing among various forms of financing is often limited by company’s size and its financial position as well as by the level of capital market development and availability of other sources, including corporate bonds
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