Follow and listen to our podcast

Get the app
Get the app

Join millions of investors on Stash

Investing, simplified

Start today with as little as $5
Get the app
Money News

Why is CVS Issuing Bonds?

March 06, 2018

  • CVS is issuing bonds to help pay for its acquisition of health care company Aetna
  • Corporate bonds typically pay more interest than U.S. government bonds
  • Corporate debt is often considered riskier than U.S. debt
3 min read

The drugstore chain CVS is issuing bonds to help fund its planned purchase of health care provider Aetna.

In December, CVS announced a $69 billion merger deal that would combine the operations of the two companies. The deal has yet to be approved by regulators.

Nevertheless, the merger will require a lot of money, and in order to fund the acquisition, CVS will need to raise some cash.

This week, CVS said it will do that that by selling $44 billion in corporate bonds. It’s reportedly the largest corporate bond sale in two years, according to the Wall Street Journal.

What are bonds?

Bonds are one of the most important parts of how financial markets work. And the bond market is large and complex, nearly twice the size of the global equities market, worth about $92 trillion, according to recent industry research.

As interest rates increase, bond prices tend to fall.

Both governments and companies sell bonds when they want to raise money. Think of bonds like a loan you make a company, which then promises to repay what it has borrowed within a set period of time, while making interest payments.

When the U.S. government issues bonds, they’re called Treasuries, and these bonds typically mature in ten to 30 years. (The government also issues bonds with shorter maturities, called T-bills.) Maturity means the period after which the bond’s original amount must be paid back, including any interest payments.

What are corporate bonds?

When companies issue bonds, they’re called corporate debt. Companies of all kinds issue bonds, and they do it to fund their operations, to conduct research and development, or to make acquisitions, among other things.

Companies typically pay more interest than the U.S. government for their debt, for several different reasons. One is that the interest on corporate debt is taxed–so to make up for that, businesses have to increase the yield on their bonds.

Another reason is that corporate debt is also inherently more risky than government debt.

Think of it this way: a company doesn’t have the power or resources of the U.S. government to promise repayment. A greater variety of things can happen to companies, even the largest and most stable companies. They can have bad years, or even go out of business.

So investors–most of whom buy bonds through mutual funds and ETFs–expect a higher interest payment for the debt, to compensate for the extra risk.

Corporate bonds are rated

There are two kinds of corporate debt: investment grade, and something called “junk”, based on industry ratings.

There are three ratings companies that research bond debt and produce a grade for it. They are Standard & Poor’s, Fitch, and Moody’s. Each one has a slightly different way of rating bonds, but the top grade for investors for all three is what’s known as a triple A, or AAA, rating. Investment grade bonds are anything above a triple B, or BBB, rating.

Junk bonds

Some companies issue bonds that are not considered investment grade. Their bonds are referred to as junk bonds.

In order to get investors to pay for the bonds, companies often offer drastically higher interest rates, or yields. That makes the bonds more attractive to investors, but the investments can potentially have a higher rate of default, which means they may not pay back the loan.

As interest rates increase, bond prices tend to fall.

These bonds have low credit ratings, or no ratings at all, because the companies issuing them may be experiencing serious financial troubles.

Inflation, interest rates and the bond market

The bond market has been going through a transition lately. Interest rates are rising and there are fears about inflation. As interest rates increase, bond prices tend to fall.

Low interest rates are good for companies that issue debt. Think of it like your credit card. The higher the interest rate, the more expensive it is to carry debt. So it is with companies. If they can issue debt that investors buy at lower rates, it’s more affordable for them to pay it back.

In 2017, with global interest rates hovering below 2%, companies issued record numbers of new investment grade bonds, with global bond volumes reaching $3.3 trillion, according to reports.

But interest rates have ticked up half a percent in 2018, which has made it more expensive for companies to issue bonds.

CVS, which will issue up to nine sets of bonds with maturities ranging from two to 30 years, and could offer interest rates of 4% or more.

By Jeremy Quittner
Jeremy Quittner is the senior writer for Stash.

Next for you
Stash Investments: Explore the ETFs, Invest in Themes

Investment Profile

Bonds Worldwide

An International Bond ETF on Stash

Learn more
Explore more articlesChoose a topic to learn more about
Careers market news pop culture politics social media

This material has been distributed for informational and educational purposes only, represents an assessment of the market environment as of the date of publication, is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice or opinion. Stash assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.

Furthermore, the information presented does not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Before investing, please carefully consider your willingness to take on risk and your financial ability to afford investment losses when deciding how much individual security exposure to have in your investment portfolio.

Past performance does not guarantee future results. There is a potential for loss as well as gain in investing. Stash does not represent in any manner that the circumstances described herein will result in any particular outcome. While the data and analysis Stash uses from third party sources is believed to be reliable, Stash does not guarantee the accuracy of such information. Nothing in this article should be considered as a solicitation or offer, or recommendation, to buy or sell any particular security or investment product or to engage in any investment strategy. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Stash does not provide personalized financial planning to investors, such as estate, tax, or retirement planning. Investment advisory services are only provided to investors who become Stash Clients pursuant to a written Advisory Agreement. For more information please visit