Question

What are the two obligations incurred by a corporation when issuing bond? And why do bonds sell at a discount or premium?

Answer 1

Solution. Firstly, bond refer to a long term instrument of indebtedness and is issued by the issuer to the holder or borrower.

Two obligations incurred by a corporation when issuing bond are enlisted below:

1.Timely repayment of the bond's principal along with interest during the time to the day of maturity of the bond.

2.Bond issuing process encompasses legal obligation on the holder to repay the full amount following or according to the stated criteria to the issuer.

Generally, big organizations issue bonds in order to raise huge capital required into the business. When rate of interest falls, market price of bonds go up selling them off at a premium. When rate of interest rises, new bonds develop and are sold in market and market price of the bond in question falls as a result they are sold at a discount. They are calculated on the basis of difference of the prevailing amount on interest from the par value and subject to fluctuation.