Corporate Bonds †Business Finance Essay

Bond – is defined as a long-term debt of a firm or the government set forth in writing and made under seal. Kinds of Bond 1. Government Bonds – are those issued by the government to finance its activities. 2. Corporate Bonds – are those issued by private corporations to finance their long -term funding requirements. Bonds as Distinguished from Stocks 1.A bond is a debt instrument while stock is an instrument of ownership. 2.Bondholders have priority over stockholders when payments are made by the company. 3.Interest payments due to bonds are fixed, while dividends to stockholders are contingent upon earning and must be declared by the board of directors. 4.Bonds have specific maturity date, at which time, repayment of the principal is due. In contrast, stocks are instrument of permanent capital financing and does not have maturity dates. 5.Bondholders have no vote and no influence on the management of the firm, except when the provisions of the bond and the indenture agreement are not met. Alternative way of bond Issuance Bonds are issued through any of the following ways: 1. Public Offering – involves selling of corporate bonds to the general public through investment bankers. 2. Private Placement – is a sale of bonds directly to an institution and is a private agreement between the issuing company and the financial institution without public examination. I. BONDS by Type of Security Debentures – are general credit bonds not secured by specific property. Mortgage Bonds – are those which are secured by a lien on specially named property as land, buildings, equipment, and other fixed assets. Assumed Bond – There are times when a corporation buys another corporation, or is merged with another. Guaranteed Bonds – is a type of bond in which the payment of interest, or principal, or both, is guaranteed by one or more individuals or corporations. Joint Bonds – There are times when a property is owned jointly by several companies. II. BONDS by manner of participation in earnings Coupon Bonds – these are bonds having attachments of a series of postdated certificates payable to the bearer for the interest over the life of the bond. Registered Bonds – these are bonds wherein the names of the owners are recorded on the transfer books of the company. Participating Bonds – these are bonds which stipulate a fixed coupon rate but which also provide a method of receiving additional income over and above this minimum sum. Bonds with Warrants – Bonds may also have warrants attached to them. The warrants is an option or a right, exercisable by its holder, to purchase stock at a stated price during a stipulated period of time. Bonds with Junior Security Attached – these are bonds which are issued along with some shares of stock in a package or block sale. III. BONDS by method of retirement Serial Bonds – is one among a group of bonds a part of which mature semi-annually or annually instead of all on a single date. Sinking Fund Bonds – Bonds may also be gradually retired with the provision of a sinking fund. Callable Bonds – The are bonds with provisions that the terms of the issue can be cancelled or called. Convertible Bonds – These are bonds which may be exchanged for the common stock of the issuing corporation at a fixed price, at a pre-determined redemption date and at the option of the bondholder. Perpetual Bonds – These are bonds which cannot be redeemed by demanding repayment. THE INDENTURE AND TRUSTEE Indenture – is a contract between the corporation and the trustee on behalf of the bondholders. Trustee – is a person who handles monies or property on behalf of another in a trust.