For many investors, bonds are
the primary alternative to stock market investments.
What Are Bonds and Bond Investing?
A bond is a written promise to repay borrowed money with interest at some future date, usually several years or more after the date of issue.
are also called notes, bills, or debt securities. Any of these terms may represent these instruments on the Balance sheet, for instance.
Bond investments differ from stock share investments regarding the factors that drive investment returns and risks. And, for much of the investment community, bonds are the primary alternative to stock market investments.
Modern usage of the term bond in finance remains true to its origins in medieval English. Since the 14th century, "bond" has meant a binding covenant or agreement, where one party is legally bound to pay a sum to another.
Why Do Companies and Governments Issue Bonds?
Companies and governments issue bonds (create debt) to borrow funds for present use. And, investors buy and sell this debt to earn interest and possibly benefit from changes in their market prices.
The issuer agrees to pay interest at a particular rate (percentage of bond face value) and then repay the principal at the end of bond life when it reaches maturity. As a result, bond investments have very different market price dynamics from other kinds of securities such as stock shares. Because investors know ahead of time the amounts and timing of future interest payments, bond prices rise or fall when prevailing interest rates change (see the section Yield, below).
When a firm issues bonds, the debt appears as a liability on the issuer's Balance sheet. And, when companies invest in bond debt issued by other companies, the debt appears on the bond-holding firm's Balance sheet as assets (See Balance sheet example, below).
Note in the following sections that there are various classes of bonds that differ concerning the timing of interest payments as well as owner options and issuer options during their lives.
Explaining Bonds and Bond Investing in Context
Sections below further explain the role of bonds in debt financing and investing in context with related concepts and example calculations. This article
Explains core principles of bond debt financing in context with bond-related terms including: bond par value, maturity, source, price, discount pricing, premium pricing, Balance Sheet, bearer bond, convertible bond, Put provision, Call provision, floating rate bond, book-entry system, and registered bond.
Explains the basic principles of bond investing in context with related terms such as: Face value, basis points, market value, interest, coupon, zero-coupon bond.
Illustrates bond calculations with examples, including the bond yield curve, current yield, and yield to maturity YTM.
Explains and illustrates bond rating systems, including Moody's Ratings, Standard & Poor's, and Fitch Ratings.
Case building is no longer a job for Finance in the back office. Indeed, financial knowledge is helpful in all case building stages. However, the most useful BCA knowledge lies elsewhere. Those best prepared to build the case are those who:
Are familiar with day-to-day operations in the business unit.
Understand the drivers for employee and group performance.
As a result, case building responsibility today rests squarely on professionals in the business unit who make proposals and take action. Consequently, likely case builders include project managers, product managers, consultants, strategists, product managers, line managers, IT directors, and others. Many are learning that meeting business case needs means producing the case themselves.
When Do You Need a Business Case? Who Requires the Business Case?
The words support and improve help explain business case need and purpose. A solid business case can support and enhance:
Decision making. The business case builds decision maker confidence by measuring and minimizing uncertainty in forecast results.
Business planning. The business case assures budget planners that spending predictions are accurate.
Management and control. For project and program managers, the case reveals critical success factors they must manage to target levels.
A solid case shows directors and authorities that decisions were made responsibly, with sound judgment, conforming to laws and policies.
When do you need a business case? A first answer is that you may need a business case when working in any of these areas.
Business Case Support is Becoming Mandatory
Secondly, you need a business case wherever it is required. Business people today are rapidly losing tolerance for management error. As a result, They also demand real accountability for decisions and plans. And, everywhere, the competition for scarce funds is increasing. Therefore, many organizations now require a business case for formal process areas such as these:
Asset life cycle management
Budgeting and funding approval
Note especially, however, that a business case requirement does not, by itself add value to the process. This kind of demand is worthwhile—enforceable—only where there are business case standards. Standards are indispensable wherever BCA is required. The reason is that decision makers and case builders must ultimately agree that a given case is or is not acceptable. Reaching agreement is difficult or impossible, absent clear, objective standards.
What are the Essential Business Case Structure and Contents?
First-time case builders often ask questions like these:
When is a business case complete?
What makes it compelling and credible?
How do you "prove" that one option is the better business decision?
If you are asking these questions, you are not alone. It seems that everyone today talks about the “business case." Nevertheless, surprisingly few people in business know what that means. Sections below address these questions through an overview of essential case structure and content.
The Business Case is Similar to a Legal Case
The business case has much in common with the legal "case" in a courtroom trial. Both cases present a rationale (reasoning) and support it with evidence. Both the trial lawyer and the business case writer are free to select or ignore evidence. And, both are free to structure arguments as they wish. Whether or not the message succeeds depends on their ability to tell a convincing story. And, usually, there are many ways to tell a compelling story. Consequently, there is no single correct outline or content list for the business case.
Looking beneath the surface, however, good cases of both kinds have much in common. Good business case examples, for instance, present rules for deciding which evidence belongs in the case. They also have "laws" that disqualify other information that does not belong in the case. A solid business case, therefore, has a "building block" stipulating case scope and boundaries. This block serves decision makers who must know that the case includes all relevant costs and benefits while excluding unnecessary costs and benefits. Clear and precise scope and boundaries statements make this possible. Absent essential building blocks of that sort, intelligent readers sense the lack instinctively, and case credibility suffers.
Define, Design, Develop, Decide, Deploy and Deliver the case
We cannot prescribe a single business case outline for all situations. We can, however, identify essential building blocks of this kind. Also, experienced case builders also aim to position basic blocks in a logically sound structure. Also presented here, therefore, a well-established, proven business case structure, the 6D Framework.TM Structure helps communicate the reasoning—the rationale—that "makes the case." Note that building blocks in stages qualify as essential because the structure weakens when any are missing.
Six stages of the 6D Framework are as follows:
1. Define the case.
2. Design the case.
3. Develop the case.
4. Decide the case.
5. Deploy the case.
6. Deliver the case.
Note that stages D-word name. These names were chosen, first because they are easy to remember, and also because they describe the purpose of each step.
The Framework Outlines Process Structure and Report Structure
The 6D framework serves, firstly, to outline the case building process. A more detailed summary of the process stages appears immediately below. Secondly, however, the same stage names also describe case report structure and contents. See, for instance, the complete case report outline near the end of this article. Note especially that each process stage leads to a significant report section with the same name. As a result, report structure mirrors process structure, exactly.
Dual use of the framework in this way is intended. Remember that case building means, above all, building and supporting a rationale. Case reports are valid, moreover, when they communicate the rationale directly and openly. Here, because process and report have the same structure, readers are led down the same logical path the case builder has just traveled. Cases built this way are likely, therefore, to survive critical scrutiny, provide useful guidance, and predict what happens
Stage 1 Define the Case Write the subject statement. Describe proposed actions and scenarios to analyze.
Also, Identify business objectives addressed. Write the purpose statement. Explain who will use the case and for what purpose.
Also, describe information the case must deliver to meet the purpose. Explain why these objectives are important.
Also, show how these objectives align with business strategy. Also, explain how current threats and constraints impact action choice.
Stage 2 Design the Case Designate case scope and boundaries. Explain whose costs and whose benefits belong in the case.
Also, stipulate the analysis period in view.
Identify essential assumptions for projecting costs and benefits. Develop reasoning to legitimize outcomes as benefits.
Explain how the analysis values non-financial outcomes in financial terms. Present one cost model for all scenarios.
Identify all relevant cost categories for the case.
Also, Identify cost items for each category.
Also, explain methods for estimating costs.
Stage 3 Develop the Case Project scenario costs and benefits as cash flow events.
Also, project impacts on non-financial "key performance" indicators (KPIs).
Stage 4 Decide the Case
Analyze and compare financial metrics from each scenario. Compare impacts on Important KPIs.
Show how underlying assumptions impact business results. Measure the likelihood of different outcomes.
Also, identify significant risks.
Stage 5 Deploy the Case Recommend one scenario for action. Set targets for critical success factors and contingencies. Provide tactics for lowering costs and increasing gains.
Also, provide tactics for accelerating gains. Identify risks to monitor over time.
Also, provide tactics for mitigating risks.
Stage 6 Deliver the Case Plan and implement the recommended action scenario.
Use analysis to maximize investment performance.
Also, show how to accelerate gains.
Also, validate and update significant assumptions continuously.
Stages and Blocks Have an Optimal Order
The list shows case-building steps and building blocks in a particular order. Note that stage sequence is vital, but the ordering of blocks within each stage is also crucial.
Stage order is vital for building a seamless, logically sound rationale. The rationale makes the case: "These results follow from this action!"
Building block order is crucial because later blocks depend on earlier blocks. The cost model, for instance, requires completed subject, purpose, and scope and boundaries statements.
How Do Subject and Purpose Statements DEFINE the Case?
The case builder writes two statements to start the Define stage:
A subject statement stating clearly what the case is about
A purpose statement explaining case purpose and case use
It is not an overstatement to say that the entire case derives from these statements.
The Subject Statement Describes What the Case is About.
There are many kinds of business cases on many subjects, but most have one characteristic in common. Each case is “about” two kinds of things:
The case analysis asks “What happens if we take this or that action?” The analysis answers in business terms. Analysis results, in other words, focus on business benefits, business costs, and business risks. Above all, analysis results predict progress towards meeting business objectives. In brief, the case is “about” meeting business objectives through specific actions.
Case building typically begins when the case builder identifies business objectives to address. These might include, for instance, reducing costs, improving employee productivity, or increasing sales revenues.
Case building continues when the case builder proposes specific actions to address these objectives. The case may consider acts such as funding a project, making a capital acquisition, or launching a product or service.
The Case Subject Statement: Actions and Objectives.
These two items together—target objectives and proposal actions—are the business case subject. Together, they define the central focus of the business case. As a result, both the case building project and the case report should begin with a clear subject statement.This statement describes precisely which actions the author proposes, as well as the business objectives they address. In other words, case builders should explain first what they recommend doing and why the organization gains from the action.
Business Case Scenarios Follow From Proposal Actions
Notice that committing to an action presents decision makers immediately with new questions and choices. A decision to bring a new product to market, for instance, raises questions such as these right away:
Should we design the product ourselves or outsource the design?
What market share can we expect for this product?
How will competitors respond to the product introduction?
What is the best gross margin we can expect for this product?
Which pricing model should we use?
What can we expect in gross sales revenues?
How much additional training will the sales force need?
When should we announce the new product? What should be the target ship date?
To develop case scenarios for the action (product launch), the analyst anticipates such questions and then assumes specific answers. The analyst may propose several different sets of answers to these questions. As a result, each set of answers defines a unique proposal scenario. In this way, asking and answering these questions, therefore, provides a basis for estimating scenario benefit and cost outcomes.
The Purpose Statement Explains How the Case Will Be Used
Some case builders rush into making cost and benefit estimates as soon as they write the subject statement. It is too early for that, however, because the case is not yet fully defined. The case builder must first answer "purpose" questions like these:
Why is the case being built?
Who will use it?
For what purpose?
What information do they need to meet that purpose?
Case builders write a formal purpose statement that answers each of these questions in clear and specific terms. They usually try to complete both the purpose and the subject statements as early as possible in the Define stage. Finishing these items before moving on to anything else in the case is crucial. That is because these statements, together, are mainly the core of the case definition. Without them, no one can know for sure which costs and benefits belong in the case.
Case Purpose Determines Information Needs for Case Results
Regarding the third bullet above, case purpose, note again that cases serve different purposes in business. The case purpose can be to address:
Decision support questions, such as “Should we fund the proposed project?”
Business planning questions, such as “How much funding will we need if we approve the project?”
Management and control questions, such as “How do we maximize returns and minimize risks?”
Accountability questions, such as “How do we show that we comply with vendor selection requirements?”
Such questions appear with increasing urgency for business people everywhere. They turn up, often, in private industry, government, and the non-profit sector. Note also, that some business case results serve all four purposes.
Consequently, a well-written purpose statement serves case builders and case readers alike. It tells case builders just what must appear in case results. It tells case readers precisely what to expect in case results.
What is the Meaning of Business Case Success?
Not all case builders understand the meaning of "business case success" alike. To the manager seeking project funding with a business case, project funding approval might seem like a success. To the salesperson, closing a sale with a BCA might seem like a success. Granted, any decision in the case builder's favor feels like "success." Nevertheless, case builders striving solely for that kind of success may be working against themselves. In reality, they may be lowering their chances for a favorable decision.
Case builders better serve their interests—and their organizations—by defining business case success differently. The most useful definition, however, takes the view of those responsible for using case results. From their point of view, a successful business case meets three criteria:
A case is credible if everyone involved believes the case rationale and case predictions.
Practical value. The case gives decision makers and planners confidence to act. It enables them to manage the action for optimum results. It discriminates clearly between proposals to implement and those to reject.
The case accurately predicts what happens.
Case builders guided by these criteria improve their chances for favorable decisions.
Notice case reviewers test these criteria in the order given.
Credibility comes first. If no one believes the case, the other criteria do not matter.
The practical value criterion comes second. If the case does not give decision makers confidence to act, no one will ever know if predictions are accurate.
Business Case Credibility is Important How Do You Build in Credibility?
Case reviewers may know a lot, or they may know little about what to look for in case results. Always, however, you can be sure they know this much. The business case looks into the future. Moreover, everyone knows that future predictions always come with some level of uncertainty. As a result, reviewers will believe they must address questions like these:
How do we know we will see these results?
How likely are other results?
Do the results include all critical financial and costs and benefits?
Are there any hidden costs or other unpleasant surprises coming?
Do the results compare different action proposals objectively and impartially?
Case builders cannot remove all uncertainty from case results. They are predicting the future, after all. However, they can reduce risk and measure what remains. Most “building blocks” in Exhibit 1, below, add credibility by providing concrete answers to the questions above.
The cost model helps to show that the results reflect all relevant costs and only relevant costs.
Risk analysis shows the likelihood of other results instead of the primary predicted results.
Deliver Practical Value Why is Business Case Practical Value Important?
Reviewers may believe every word and number in the case, yet still, lack the confidence to act. Usually, this means the case builder did not fully anticipate what reviewers expect to see in case results. When this happens, they may return it to the case builder for re-work or more research. Alternatively, they may ask for other kinds of business results. Also, they may ask the builder to clarify supporting arguments. Alternatively, they may merely table the case and take no action on it. With responses like these, reviewers are saying they do not have the confidence to act upon the results. The business case, in other words, fails the practical value criterion.
Building in Practical Value
Case builders can build in practical value by determining at the start of the case-building project specifically:
Which decision criteria are essential to reviewers? These are the criteria that turn their decision one way or the other
Which outcomes do reviewers are looking for in the results? These may include financial and non-financial measures.
Which business objectives are management's highest priorities?
Which other factors may influence their decisions (e.g., mandatory legal requirements or a cash flow shortage).
What information must planners see in the case? (e.g., total capital costs, or investment payback period).
How will they prioritize competing proposals?
How much uncertainty will they accept in projected results?
Experienced case builders answer these questions as well as possible, as soon as possible. Having answers is crucial before closing the first stage, Define. This information is vital for every building block in the second stage, Design. The answers, together, tell the case builder precisely what it will take to "make the case." The answers, in other words, enable the case builder to meet the "practical value" criterion,
Practical Value Information Does Not Appear Automatically
Note that answers do not appear automatically after first proposing action. Answers are not in view because "practical value" information needs derive from the broader business context, not the action. Finding answers usually calls for serious research in areas such as these:
Current business situation
The current business plan
Individual reviewer values, priorities
Relevant laws, regulations
High-level business objectives
Previously accepted proposals
Previously rejected proposals
Current threats and constraints
In summary, the case builder develops and writes "practical value" information early in the Define stage. That information is summarized tersely in the formal purpose statement. The "Background and context" block may elaborate on this information. And, where appropriate, a "Threats and constraints" block may also elaborate.
Deliver Accuracy The Case Must Predict What Happens
Failure on the first two success criteria (credibility and practical value) may disappoint the case builder. However, failure on the third criterion—accuracy—can hurt the entire organization.
Such failure can be especially painful if reality turns out much worse than predicted. When products fail in the market, people ask "What went wrong?" When projects are grossly over budget, they ask "How did this happen?" Alternatively, when valuable assets do not justify their keep, they ask "Why aren't they earning more?" In all cases, the problem very likely started with business case analysis that failed the accuracy criterion.
Is Business Case Accuracy Possible?
Some people object at this point, saying something like this:
"Testing accuracy takes time. We are projecting business results three years into the future, after all (or five years, or twenty years). We won’t know how the case scores on accuracy until the end of that period!"
Also, putting the spotlight on business case accuracy makes some people uncomfortable. They ask why they should be accountable, years later, for delivering on predictions made today. They may say:
"Things change! All we know for certain is that today's assumptions will be different in a few years."
Keys to Business Case Accuracy
The knowledgeable case builder has two excellent responses to these objections.
First, some of the case building blocks presented here enable the case builder to minimize and measure uncertainty in the projected results. The case builder can begin doing this even before starting proposal implementation. It can continue throughout investment life. Using these building blocks, case builders can produce and support claims like these:
“The 90% confidence interval for five-year net cash flow is$8.0 ‑ $13.2 million.”
“The probability that next year’s training costs exceed $120 thousand is less than 0.05.”
Secondly, we can begin testing and improving accuracy immediately, once a proposed action begins. In this way, the business case provides a powerful kind of statistical quality control for projects, programs, asset management, and other business investments. Understanding how this works begins with understanding the role of assumptions in projecting business costs and benefits. For more on testing accuracy this way, see Business Case Essentials).
The Nature of Business Case Proof How Do Business Case Scenarios Make the Case?
Where in the case, exactly, is the proof that one possible action represents the better business decision?
Business Case Proof is Similar to Laboratory Proof
Business case proof relies on reasoning very similar to the rationale for proving cause and effect in the scientific laboratory. Here, the scientist uses a controlled experiment to ask if one factor causes another. The researcher demonstrates “proof” by comparing experimental results from different, carefully controlled test conditions.
Similarly, the business case author proves that one proposal or another is the better choice by comparing carefully designed scenarios. Generally, a "scenario" is an account, or story, showing what happens under one course of action. In the business case, the “what happens” appears in business terms that are important to decision makers and planners (See Practical Value, above).
The Case Proposes Actions to Support Business Objectives
Consider an example case for a company that designs and manufactures mechanical assemblies. Management has several serious concerns. Costs are rising faster than sales revenues. Competitors are taking market share from the company. Moreover, the current sales forecast is weak. As a result, management focuses on several business objectives that are especially important:
Reducing design and manufacturing costs.
Greater ability to design more complex products
Increasing the number of products developed and sold each year
Increasing the productivity of salespeople
Increasing product gross margins and overall gross profits
Reducing new product design time
Reducing manufacturing setup time
They may consider many different ways to address these objectives. And, they may propose a few specific actions that seem promising. Proposed activities might include the following:
Deliver specialized training for engineering and manufacturing professionals.
Specialized training for Sales accounts managers and salespeople.
Reorganize engineering design teams.
Upgrade the engineering design system software.
Implement an ERP (Enterprise Resource Planning) system, to better integrate and synchronize engineering, manufacturing, and sales data.
An Initial analysis might show immediately that one or more of these are "nonstarters." Here, for instance, the ERP option was disqualified quickly, without a full BCA. Of the remaining four actions, however, which is the best course? Should they try one solution or a combination of these?
Scenarios Make the Case
A business case addresses these questions by comparing different action scenarios. Here, management settled on two proposed action scenarios. "Scenario 1" includes the software upgrade, only. Scenario 2 recommends taking all four actions together. They also added a third scenario, a baseline scenario called "Business as Usual." The business case will evaluate and compare these scenarios:
Firstly: Scenario 1, Proposal: Upgrade engineering design system software.
Secondly: Scenario 2, Combination proposal: Train, reorganize, and upgrade software.
Thirdly: Scenario 3, Business as usual: Management takes none of the proposed actions.
Exhibit1 (below) summarizes business case structure and content. In this framework, the six stages define the structure, while building blocks in each stage provide content. Note that each block helps build credibility, practical value, accuracy in the case results.
Each scenario projects business results under a specific set of assumptions and actions.
Each scenario projects business results for a specific period into the future. These include likely financial costs, as well as expected progress towards business objectives (benefits).
Management takes none of the proposed actions. Metrics frequently include NPV, ROI, payback period, and IRR.
Case results also include Important contributions to non-financial objectives under each scenario. These may or may not be valued ultimately in financial terms. Regardless, analysts always measure these contributions in concrete terms and explain their importance in business terms.
The baseline "Business as usual" scenario allows measurement of incremental changes due to possible actions. Using the baseline in this way is the only way to measure relative changes. Relative changes include all improvements, reductions, or savings,
From the scenario comparison and risk analysis, the author recommends one scenario for implementation. The author may recommend a proposed action scenario, or even the baseline "Business as usual" scenario.
Business Case vs. Business Plan How Are They Different? How Are They Related?
Some business people use the terms business case and business plan more or less interchangeably. And, some use one term when they mean the other. As a result, case builders are often asked to define these terms, precisely, and clarify the difference. In fact, the critical distinction is easy to summarize. The business case is about a proposedaction, while the business plan is about thebusiness.
What will the business look like in one year? In three years? In other words, what will financial position and earnings look like then?
How can the business achieve those results?
What sales, margins, and revenues can we expect next year?
How long will it take for a start-up company to earn a prof?
The business plan answers such questions by providing:
Predictions and target objectives for future financial results.
Important risk factors that would bring different business results. The plan also presents strategies for dealing with threats and reducing risks.
A business model. The model shows where and how the company expects to spend money, bring in revenues, and earn margins.
Fundamental assumptions and trends for projecting business results. These may focus on business volume, market demand, and competitor actions. Management tracks these factors carefully and updates them when necessary.
Guidance for setting and prioritizing business objectives.
Spending and revenue forecast for budgeting and planning.
Questions for the Business Case
The business case focuses on a single action or decision. The business case addresses issues like these:
What will be the financial outcomes if we choose option X?
Are there significant non-financial outcomes we can we expect in either case?
What is the capital budget impact if buy service vehicles instead of leasing them?
Is the investment in new phone technology justified? Is there a positive ROI?
The business case addresses such questions by projecting cost and benefit cash flows that follow from the action. Also, the business case also anticipates non-financial impacts on crucial "key performance indicators."
Comparing the Business Case to the Business Plan
The table below summarizes and contrasts critical differences between the business case and business plan.
A Business Case...
A Business Plan...
Is organized around:
A single action or single decision and its alternatives.
An organization or the whole enterprise. Also, the plan may cover a single product or product line.
Cash flow results and critical non-financial impacts that follow from the action.
Business performance of the organization. These are the main sections of the Income statement. And, the plan may also include Pro-forma Balance sheets for future years.
Business objectives for the action
Business objectives for the organization.
Is based on:
A cost model and a benefits rationale. These are designed specifically for the case.
The company business model. This model shows where and how the company earns margins. It also indicates likely trends, competitor actions.
Financial metrics such as NPV, IRR, ROI, payback, and TCO, based on projected cash flows. Case results also include critical non-financial impacts.
Business performance in terms such as sales, margins, and profits. Also, The plan measures business "health" concerning Balance sheet categories.
In a non-profit or government organization:
The scope of the case includes benefits and costs to the organization. And, it may also include the population served.
The plan may focus on funding and budgetary needs. The emphasis is on these needs because staying within the operating budget is a primary objective.
Business Case Building Resources
For a complete introduction to business case analysis and case building, see the Solution Matrix Ltd. ebooks:
For quality professional training in case building, we invite you to join a Solution Matrix seminar. Our flagship event is the 3-day course "Building the Business Case Master Class." Public offerings meet several times each year in New York City, London, and Washington DC. Private offerings are delivered in all months, worldwide. For more on the premier business case seminars, see https://www.business-case-analysis.com/business-case-seminar.html