Question

	Bonds	Stocks
2013	1,337,544	191,512
2014	1,485,786	174,601
2015	1,611,250	173,966
2016	1,487,629	138,102
2017	1,807,829	143,996
2018	1,526,272	131,328
2019	1,751,659	168,598

a. Calculate and report the average share of the bonds’ issuance in the U.S. primary corporate capital market during the analyzed period. What does this number tell your about the relative importance of corporate bonds versus equity in raising new external finance by the U.S. corporations?

b. Formulate one simple lesson based on your analyses of the data and offer some potential explanations behind the observed patterns.

Answer 1

a. Calculate and report the average share of the bonds’ issuance in the U.S. primary corporate capital market during the analyzed period. What does this number tell your about the relative importance of corporate bonds versus equity in raising new external finance by the U.S. corporations?

Calculation of average market share of bond v/s equity in extenal finance

Average maket share of bonds are almost 9.81 times more than equity. US corporations are preferred bonds to raise external debt and US investors are also comfortable regarding investment in bonds than equity.

b. Formulate one simple lesson based on your analyses of the data and offer some potential explanations behind the observed patterns.

1. Bond is debt security. Issuing company owes debt and obliged to pay fixed interest till maturity to the investors and return entire principal amount at the end of maturity.

2. Bond is less volatile and its cashflow is measured precisely. It is always considered more safe than equity shares.

3. Issuer company will tailor made bonds according to thier needs.

4. While equity shares carries high risks. It needs some research and knowldge on the part of investor. Dividend of equity shares are not guaranteed. Hence, Investor earns through capital appreacial only.

5. Equity shareholders are owners of company. By issuing equity shares, promoters dilute thier stake and this pose a risk to dilute his control over company.

Hence, For US corporations, They can raise finance by issuing tailor made bonds ( with interest rate and maturity terms etc.) without diluting control over functioning of corporation.

For US investors, bond are giving fixed income for the certain period of time. It is much safe than equity.