Learning Objective # 2

Discuss why corporations issue bonds.

LO#2

Why Corporations Sell Bonds

To borrow money to pay for major purchases

Difficult or impossible to sell stock Finance ongoing business activities To get money to operate or expand The interest paid to bondholders is a tax

deductible business expense

LO#2

Four Types of Corporate Bonds

Debenture Bond Most corporate bonds are

debenture bonds Backed only by the reputation of

the issuing companyMortgage Bond

A corporate bond that is secured by various assets of the issuing firm

LO#2

Four Types of Corporate Bonds

Subordinated Debenture Bond An unsecured bond that gives

bondholders a claim secondary to that of other designated bond holders with respect to interest payments and assets

Convertible Bond Can be exchanged, at the owner’s

option, for a specified number of shares of common stock

LO#2

Provisions for Repayment

Call Feature Corporation can call in or buy back

outstanding bonds from current bondholders before the maturity date.

Most agree not to call bonds for the first 5 to 10 years after they are issued.

They call bonds if the interest rate they are paying you is very much higher than the going rate.

Most corporate bonds and municipal bonds are callable.

LO#2

Provisions For Repayment

Sinking fund A fund to which annual or semi-annual deposits are made for the purpose of redeeming a bond issue

Serial bonds One issue of bonds that mature at different dates

LO#2

Other Types of Bonds

Domestic, Foreign & Eurobonds Issued in the country and currency of

the issuer Units

Two or more corporate securities bundled by an investment dealer and sold at an overall price

Strip Bonds Coupons and bonds are sold

separately at significant discounts

LO#2