What Is a Tap Issue?

Bond Tap Sales, Explained in Less than 4 Minutes

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Definition
A tap issue is a method of issuing new bonds based on past debt issues.

A tap issue is a method of issuing new bonds based on past debt issues. The newly issued bonds have the same par value, coupon rate, and maturity date, but the price is based on the prevailing market rate.

Governments and corporations use tap issues because it minimizes the costs and time required to issue new debt. Learn more about how a tap issue works including details on the basic process as well as a real-world example.

Definition and Examples of a Tap Issue

A tap issue is a way of issuing new securities, primarily bonds, under the same terms as a previous issue. The face value, coupon rate, and maturity date remain the same. However, current market conditions determine the price of the new issue. 

The federal government, municipalities, and corporations issue bonds as a way of financing debt. When you invest in a bond, you become a creditor and the issuer is the debtor. The issuer agrees to make interest payments, known as coupons, and repay the principal—often referred to as the face value or par value—when the bond reaches its maturity date.

  • Alternate names: Tap sale, bond tap, additional placements, reopenings

With a tap sale, the issuer authorizes an issue of a bond, but then a portion of that issue is held back for future sales. Tap sales maximize flexibility for the borrowing entity. Issuers will often use this approach when they’re not certain about future financing needs. They can issue debt in tranches to obtain the most favorable financing terms based on current market conditions.

Note

Tap issues are common with U.S. Treasury securities. For example, the U.S. Treasury issued 10-year notes in February, May, August, and November of 2021. It scheduled reopening one month after each original issue, then scheduled a second reopening two months after the original issue. It issued five-year Treasury Inflation Protected Securities (TIPS) in April and October of 2021. A new tap issue was scheduled for two months after each original issuance.

Fixed-rate bonds and interest rates have an inverse relationship. When interest rates rise, the price of bonds drop. When rates fall, bond prices rise. The reason: If interest rates drop, existing bonds become more valuable because they yield more than bonds issued at the current rate. But if interest rates rise, the value of existing bonds drops because a newly issued bond pays a higher rate.

How Does a Tap Issue Work?

There’s no limit on the number of tap sales for issuers. Sometimes governments will issue hundreds of additional placements for bonds.

A tap issue can take place via auction, which is common for government-issued bonds, or through the underwriting process. In some cases, new issues can be made using a different method than the original issue. The issuer can set a fixed price for the new bonds, or it can set a minimum and allow market conditions to dictate the price.

Note

The advantage of tap sales for the issuer is the flexibility they provide. The government or corporation can issue new debt when market conditions are most favorable. 

What It Means to Individual Investors

Tap issues are also common among governments of developing countries, where access to cash may be limited and demand for government-issued securities can be difficult to predict. The issuer can also avoid the legal and transaction expenses associated with issuing new bonds.

You can find detailed information about the terms of a bond, including the bond’s purpose, when and how interest payments and repayment of principal will be made, and whether the issuer can redeem the bond before its maturity date on the bond’s prospectus.

Key Takeaways

  • A tap issue is a way to issue new bonds at current market prices using the terms of a past issue.
  • In a tap issue, the bond’s face value, coupon rate, and maturity remain the same, but the price is determined by the current market.
  • Tap issues allow borrowing governments or organizations to issue new debt when market conditions are most favorable. They’re common when the issuer isn’t sure of its future financing needs.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. Securities and Exchange Commission. “Bonds.” Accessed Dec. 15, 2021.

  2. Matthews, Andrew., Graham, John., Graham, Dianne. "Macmillan Directory of Technology in Global Financial Markets." Page 276. United Kingdom: Macmillan, 1990. Accessed Dec.15, 2021.

  3. U.S. Treasury Department. “Institutional - Treasury Reopenings.” Accessed Dec. 15, 2021.

  4. U.S. Department of the Treasury. “Interest Rate Risk — When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall.” Accessed Dec. 15, 2021.

  5. International Monetary Fund eLibrary. “Chapter 5; Developing a Primary Market for Government Securities.” Accessed Dec. 15, 2021.

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