Question

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How do bonds provide financing to corporations for their capital projects? Issuing bonds is the easiest most effective way to raise money to do the things needed to allow the company to grow without taking a loan from the bank with higher interest rates. A investor basically loans the company the money in exchange for interest payments. Companies are more willing to issue a bond and pay a lower interest rate.

What are the key differences between using bonds to finance capital projects and using stock for that purpose? The key difference is that with bonds companies can continue to issue all the bonds that they want just as long as they have investors who are willing to invest the money for a certain interest rate. When a company does this it does not have any impact on ownership and the way the company is operated or the shares distributed. With stocks you have to put up shares of the company, which will mean that the company brings in less money because of the sharing of the revenue with the stockholders of the company.

References

Smith, L. (2018, December 21). Why Companies Issue Bonds. Retrieved January 14, 2019, from https://www.investopedia.com/articles/investing/062813/why-companies-issue-bonds.asp

The value of a bond is dependent primarily on two factors. Name and explain these factors. The value of a bond is dependent on the value of its cash flow in terms of the present value of the coupon payments and the present value of the par value. The coupon changes according to the current interest rate. When the interest rate falls lower than the coupon rate then the value of the bond payment rises. The length of payments remaining before maturity is also a factor as it represents a greater or lesser portion of the value. The current value of a bond is always measured against the going interest rate, which determines what will be paid out.       

Compare and contrast the differences between stocks and bonds. The characteristics of bonds is that the value rises and falls depending on interest rates, interest payment are tax deductible by the corporation, equity is not lost through issuance, unpaid debt is a liability, can be issued at any time for any reason and the creditors have not voting powers. The characteristics of stocks is that the value rises and falls depending on the value that the stock trades are at, dividends are not tax deductible, loss of stock value creates no liability, can only be issued one time, equity owners can control the company with voting powers and stock issuance is based on transfer of equity.

Answer 1

1. Bonds are a form of debt for the organisation and though they are an easy way to raise money they carried is in the form of default risk which may even lead to bankruptcy of the organisation. An organisation issues bonds which are purchased by investors in exchange for a promise of fixed coupon payments.

2. The main difference between the use of bonds and stock is that of ownership. Bonds are debt for the organisation while stocks represent giving the share of ownership of the business.

3. The explanation is precise since the value of a bond is derived as the present value of future cash payments associated with the bond. Hence the coupon payments as well as par value of the bond are discounted at the current interest rate.

4. The value of a bond depends upon the market rates of interest and it represents a liability which has to be paid by the organisation. The initial investment in the stock however does not have to be repaid to the shareholders. The major difference is that bonds carry a fixed rate of interest while stockholders receive dividend which will fluctuate depending upon the profits earned and the management policy.