Question

Part 1 discussion point:

Why bonds?, bond issuance (bond offering) versus stock issuance from a corporate perspective in terms of capital need. In other words, what are some of pros and cons of this two pathways of corporate financing options? One, through "Debt Financing" (long term liability section in financial reporting, ch.14) as opposed "Equity Financing" (ch.13 paid-in-capital of equity section of financial reporting)? Please also think about the related concept of "Financial Leverage". Please discuss ups/downs (pros and cons) between the two capital raising/structure.

Part 2 discussion point:

Now everything said and done with bonds, what is then difference between bonds and loans (bonds vs. loans as long-term debt)? Please discuss as many difference as you think of, from a corporation perspective as well as from an investor/lender perspective.

Answer 1

1.bond is issued by the corporate because there is a tax advantage associated with them and interest payment on bonds are exempt from taxes so corporations are inclined on issuing debt financing through bonds.

stock issuance does not have any fixed payment associated with it while bond issuance have fixed payment element associated with it.

Stock issuance dilute the control of existing shareholders while bond issuance does not dilute any control.

Stock issue does not have tax benefit while bond issuance have tax benefits.

financial leverage is a concept of incorporation of debt capital into overall capital structure because of tax advantage and when the overall rate of return of the company is higher than the overall cost of debt it is beneficial for company.

2.bonds and loans have different perspective as bonds are continuously traded and they are enabled with price discovery where loans are not continuously traded.

Loans obtained from Bank oil bonds are obtained by issuance from public

bonds are generally more reflective of a financial position of a company while loans can even be obtained through personal settings.