Question

TABLE 15 marks) Required: In your oy in your own words (do not simply copy a response from the textbook or the internet) answer the following questions: a) Describe what a bond is? (2 marks) b) For the issuer of the bond, why would they prefer to issue bonds over shares? (2 marks) c) On a balance sheet should a bond be classified as a liability or equity? (1 marks)

Answer 1

a) A bond is also know as fixed income security, is a debt instrument created for a purpose of raising capital. Their are essentially a bond agreement between issuer and investor , in which the bond issuer and an investor, in which the bond issuer is obligated to pay specifief amount of money at a specified future dates

b)Since bonds are a form of debt, the existing stockholders' ownership interest in the corporation will not be diluted.Therefore, the future gains from use of the bond proceeds will flow to the stake holders

  Interest on bonds and other debt is deductible on the corporation's income tax return while the dividends on common stock are not deductible on the income tax return.

C) bond is clasifed as a liablity in balance sheet, because the company is liable to pay to the investors in the bonds