Many companies choose to raise funds to finance activity by issuing bonds, usually in addition to public offerings of shares. Bondholders receive periodic interest payments from the issuer, as predetermined, but contrary to stockholders – they do not have other rights in the company, such as voting rights or participation in the management of the company.
Investment in bonds is potentially less profitable than investment in stock, but on the other hand, it is usually safer. If a company goes bankrupt, bondholders usually receive higher priority than shareholders in collecting debt.
The risk level of a bond is determined by the financial status of the issuing company and the collateral it provides investors, compared to other liabilities the company may have. Rating agencies analyze the financial condition of companies and rate them by ability to return debt to bondholders. Currently, two rating firms provide these services in Israel – Maalot (affiliated with S&P) and Midroog (affiliated with Moody's).
Investment houses sometimes prefer to issue a type of financial product called a structured note, which is a synthetic debt obligation with embedded components and characteristics that adjust the risk/return profile.