Question

Explain one type of bond to the group.  Examples (all usable, but no duplication) are junk bonds, mortgage bonds, bonds with sinking funds, equipment trust certificate, debentures, etc.  What advantages and disadvantages to each the issuer and the investor?

Answer 1

one of the types of group bond is debentures:

when debentures are issued, it turns out to be a liability to the company, and correspondingly, interest on the debentures issued is an expense to the company and it is tax deductible. so, most of the compa=nie prefer to issue debentures over equity.

Following are advantages of issuance of debentures

To the issuer:

• it is tax deductible. as the interest is the expense to the company.
• relatively cheaper than raising capital through the issuance of equity.
• debenture holders do not participate in the management of the company. so it is an independent source of income.

To the Investor:

• it gives a fixed rate of return to the investor.
• irrespective of the financial position of the company, the investor is always being paid its obligation (interest). so investor need not worry about the performance of the company.

Following are disadvantages of issuance of debentures:

To the issuer:

• it creates a fixed percentage of debt to be paid at every time as per the agreement.
• even if the company is making losses, it has to pay interest on debenture. as it is debt and not equity,while n case of equity, there is no such an obligation on the company to pay the dividend.

To the Investor:

• the only disadvantage to the investor can be, it gives a lower rate of return as compared to equity shares.
• interest income received by the investor is not tax-free. so, investor needs to pay taxes on interest income.