Bonds

1 Introduction - Main corporate securities

Every organization needs money in to be able to finance their projects . In business companies there are two main sources of finance available , equity and debt . It is in the best interest of financial managers to select finance mediums that maximize shareholders wealth and improve the value of the firm . In the assignment our scope is to describe the latter finance mediums and outline its distinguishing characteristics

1 .1 Corporate bonds

The choice of long-term financing for a corporation mainly rests between equity and debt

financing . Corporate bonds form part of debt financing and are usually attained by firms in to financing capital projects of a long-term nature . Several theorists contend that bonds are beneficial to the value of a company due to their inherent limitations However noble laureates Modigliani and Miller contend that the choice of capital structure is irrelevant to the value of an organization and the gist of its assessment rests on the investment of profitable projects We will not enter into the detailed explanation of such theories in to continue focused on bonds definition and illustration , which is the vital point of this assignment

1 .1 .1 Reasons for issuing bonds

The main source of debt , which a company issues , is a corporate bond Companies tend to prefer to issue bonds rather than other finance options due to the following reasons

Bond buyers usually offer finance for a longer term than banks . Banks frequently provide loans within a time frame of five to seven years . If directors prefer a longer term , like for example twenty years , they have to shift to bonds

Frequently bond issues are the lowest cost source of finance available for the firm

Shareholders often prefer to keep their voting power and they dislike losing such power due to share issues for project finance purposes

1 .1 .2 Mediums through which bonds are issued

Bonds issues can be made either to the general public via a public offering or to limited electives like banks , insurances and more

In public issue of bonds a bond indenture is prepared , which consists of a loan document that states the covenants1 between the bond buyers and the company . There are two categories of covenants , affirmative and negative . Affirmative covenants are promises the firm makes concerning things it will do . For example , the company will reveal in what project the money received will be invested . While , negative covenants are commitments covering for instance , that the organization will not change its corporate structure during the bond period and /or the firm will not dispose of significant assets as a security for the bondholders

Situations of a bond public issue request the appointment of a corporate trustee with the obligation to monitor the bond covenant and protect the bond buyers form any loss arising due to illegal activities by the firm The bondholders have legal claim in cases of negligence by the corporate trustee with respect to its obligations . The corporate trustee...