Loan Of Bonds And Preferred Stocks Are Considered Primarily Creditors Of A Business

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Q2: Owners of bonds and preferred stocks are considered primarily creditors of a business. However, in some instances they also have the capability of becoming corporate owners. a.) Converting debt to stock equity Convertible debt is a form of security, which in most cases issued to start-ups at the time of raising capital. The seed investor is given a promissory note that contains a conversion feature (Kimmel & Weygandt 2007). The conversion feature contains a mechanism in which the debt can be converted into equity at a later date. There are several instances when the debt issued to a company by an investor can be converted into equity. Some of them include; Qualified financing- most of the promissory notes issued to a startup investor…show more content…
These triggers can be an event or a set of events, a revenue threshold, a business milestone or any other financing threshold. Mostly a financing event is the most preferred one. b.) Differences between preferred stock and bonds. A preferred stock is a form of special equity ownership. They are commonly considered a form of investment that occurs somewhere between common shares and bonds. Bonds, on the other hand, are a form of the debt issue. Despite the two having numerous similarities, preferred stock has a tendency to be riskier than bonds, but they attract higher yields (Kimmel & Weygandt 2007). In an instance a company has gone bankrupt bonds take preference over preferred stock when receiving payments from liquidation process. To protect from market anxiety that come with bonds and preferred stock it is advisable that they invest in convertible securities. Convertible securities can provide income like a bond, have potential for growth based on the conversion option. Investing in such is a sure way that an investor will not lose their investments in a volatile risk. c.) Advantages of Tax exempt bonds to both issuer and holder Tax-exempt bonds offer great advantages to both the bond issuer and bondholder. For the bondholder: Keep most of interest income - the main advantage of tax-exempt bonds is that the investor gets to keep most the returns due to the exemption. The fact is that one does not have to pay tax on the interest income (Melville, 2013). Low
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