In: Finance
how does a bond works?
Bond is a debt instrument which is used by company in order to raise debt Capital. Bond are generally used for raising debt capital for longer as well as shorter period of time by the company.
Bonds are issued by the company and then they are subscribed to the public and that will be representing a stake of creditors in the company and these creditors are mostly secured creditors and they will be having a preferential claim on the Assets of the company in case of the liquidation.
Bonds will be generally issued with an intention of raising money for the growth and expansion of the company and they are used by various companies to help themselves in not dissolving any kind of equity capital. These cost of bonds are fixed in nature and they will be paid with the the fixed interest and it is irrespective of whether the company is making profit or company is making loss so these payments are mandatory in nature so they will be having a cost of insolvency and financial distress attached to them.
The interest which are paid on the bonds are tax deductible in nature and these interest are generally having the text shield so before raising the bond, a company should be trying to balance the benefits associated with interest rate tax shield and cost of financial distress of the bonds.
So, it can be summarised that bonds are generally a form of debt instruments which are very popular in nature and which are used by company in order to grow and expand.