Question

Why are bonds considered a form of debt financing? What does it mean if a firm issues a 9 percent debenture bond due in 2028? Explain the difference between an unsecured and secured bond.

Answer 1

1. Debt financing means taking a loan for meeting the obligation of capital expenditure or working capital needs.

There can be short term or long term form of debt financing.

It doesn't give ownership right to the lender.

Bonds are an instrument by which the company raises money in the form of a loan. It needs to repay it with interest.

That's why bonds are considered a form of debt financing.

2. It means the company will pay 9% interest per annum on face value till 2028 & pay the redeemable value on maturity in 2028.

3. Unsecured bonds do not have a charge on the asset of the company. That is they are not protected specifically buy an asset of the company. In case of default by the company.

secured bonds have a charge on the asset of the company. That is they are protected specifically buy an asset of the company. In case of default by the company, the company will repay back the bondholders by selling the asset (which act as a charged).

For example bondholders having a charge on plant and machinery of the company. In case of default plant and machinery will be sold and the proceeds will be used to repay the bondholders.