The Bond Fundamentals : The History Of Corporate Bonds

There are organizations that decide to issue bonds in most cases go through a series of six steps:

1. Briefly explain why many corporations prefer to issue callable long-term corporate bonds rather than noncallable long-term bonds.

40%/9% Bonds and Common Stock generates a lower EPS, EBT, and Net Income in all years in comparison to the 50/50 option and is therefore not a practical capital structure option. The interest paid on bonds creates a lower EBT, net income, and total income available for common stockholders for all years in comparison to the 50/50 option. A capital structure of this mix might make banks reluctant to loan money due to the organization debt to income ratio. In addition, investors may be hesitant to invest due to the slow capital growth indicated by the

When the contractual interest rate and the market interest rate are the same, the bonds are sold at face value. But when the contractual interest rate and the market interest rates differ then the bonds are usually sold below or above face value. If the market rate of interest is lower than the contractual interest rate then the investors will have to pay more than the face value for the bonds (premium). When a company issues 12% bonds at a time when other bonds of similar risk are paying 15%. Most investors will be more interested in buying the 12% bonds and their value will fall below their face value, which is called selling at a discount.

Discuss Buffett’s analysis of the junk bond failures of the 1980s.What is Buffett’s view of the role to be played by investment bankers?

WorldCom has the option to extend its bank loan credit facility or to issue this large $6 billion in debt. It plans to use the rolling commercial paper program to pay British Telecommunications for MCI’s share purchases, and then use bond proceeds to pay off the commercial paper program. This signals that WorldCom does not need the money immediately for a single corporate purpose, and does not need the money immediately. Therefore, perhaps it makes sense for WorldCom to issue the bonds in smaller installments rather than flooding the market with $6 billion in debt all at once. The first reason for this is that, if an underwriter must first purchase the bonds before selling to investors, an underwriter may demand greater spread in order to justify taking down an entire $6 billion in debt using the bank’s capital assets. The second

If the company benefits from the provision of the bond, then the coupon rate will be higher. If the bondholder’s benefit, then the bond will have lower coupon rate.

The advantage to choosing a convertible bond for financing is that "they provide issuers with ‘cheap' debt and allow them to sell equity at a premium over current value". Jen, Choi, Lee (1997).

However, the issuance of debt can have signalling effects for investors. Generally, when firms issue debt it signals to investors that the firm is in a good financial situation as the firm is able to undertake repayments of future interest.

Examples of bond rating agencies include Standard and Poors as well as Moodys. According to the bond credit ratings issued by Standard and Poors, as shown in appendix 1, bonds given an AAA rating have got an almost zero level of credit risk. Nonetheless, bonds rated A and above appear to be safe investments whereas bonds with BBB ratings and below appear as relatively riskier investments.

Lending investments allow you to be the bank. They tend to be lower risk than ownership investments and return less as a result. A bond issued by a company will pay a set amount over a certain period, while during the same period the stock of a company can double or triple in value, paying more than a bond - or it can lose heavily and go bankrupt, in which case bond holders usually still get their money and the stockholder often gets nothing.

Firstly, interest on debt is tax deductible, therefore, debt is the least costly source of long-term financing as this is a tax saving for the frim. Thus, creditors or bondholders require a lower return on debt as it is considered a reflectively less risky investment. Secondly, the capital structure of a firm is flexible due to debt financing. Ultimately, bondholders are creditors and they do not have voting rights, hence, they are not involved in decision making and business operations. Additionally, the major advantages of equity finance are as follows. Firstly, the capital provided is to finance the businesses short term needs and future projects. Secondly, the business will not have to pay any additional bank expenses such as interest on loans, thus allowing the business to use the money for business activities. Lastly, investors anticipate that the business will develop thus they help in exploring and executing thoughts. Certain sources, for example, venture capitalists and business angel can bring significant skills, abilities, contacts and experience to businesses and they can also provide expertise advice to businesses (Hofstrand,

A bond is a "security" which gives the holder a financial claim on the issuer. This claim protects the holder in circumstances in which the issuer is unable to pay the amount due. It is made formal by the "trust indenture", a legal document, which specifies all of the bond's features and the legal rights and obligations of all the parties to the agreement (http://www.finpipe.com/bndchar.htm).

Many government related institutions issue bonds, some supported by the revenues of a specific institution and some guaranteed by a government sponsor. For example, in Canada they have a bank that issue bonds that are guaranteed by the

6. Yes, we think that it is better for the society if companies use debt. This allows people who have extra funds and need to invest it to earn interest revenue on their funds. Debt is generally less risky than equity investing because as we know debt has certain maturity date and