Question

1. "An investor who buys a corporate bond is lending money to the company". Is this statement true or false? Explain. What cash flows should the investor expect to receive? 2. The following is an excerpt from "Netflix Borrowing $2 Billion as War for Content Heats Up". What Bloomberg Intelligence Says "Netflix may issue new junk bonds for several more years as proceeds from debt sales fuel not only free-cash-flow deficits, but also repayment of bond principal. While Netflix may not produce free cash flow until 2023, it must address a $500 million bond principal in 2021 and another $700 million in early 2022." --Stephen Flynn, corporate credit analyst Source: (https://www.bloomberg.com/news/articles/2019-10-21/netflix-selling-2-billion-of-junk-debt-as-content-war-heats-up (i) Why is Netflix issuing the bonds? (ii) Discuss the level of risk of these bonds. (iii) Why might an investor buy these bonds?

Answer 1

The Statement is True. Infact, an investor buying a corporate bond is lending money to the company. The Corporate bonds are alternate source of Debt for companies and is gaining popularity among the corporates. Not only can a good company raise huge amount of debt from the public at a competitive rate by issuing corporate bonds, but the corporate bonds are generally unsecured and hence frees up the company's assets. For the Investors, it provides benefits of fixed and steady income, lower risk and liquidity as the bonds can be sold on exchanges.

In return for the bonds, the investors are usually compensated by fixed coupon payments at regular intervals at a stated rate as well as the redemption of principal amount at bond maturity.