Question

Explain why a bond would be issued at a Premium or a Discount depending on the difference between the stated and market (effective rates).

Explain why a company may want to issue bonds as a source of financing. What potential benefits might the issuance of bonds have over the issuance of equity securities (common stock)?

Explain (in theory – not formula) how the value (issue price) is assigned to bonds/warrants if bonds are issued with warrants.

Answer 1

1	Explain why a bond would be issued at a Premium or a Discount depending on the difference between the stated and market (effective rates)
	Bond Coupon rate (Bond Interest rate) and market expectation would be deciding factor for issues price of Bond. In other words, decisions regarding whether bond will be issued at premium or discount is depends upon coupon rate and market expectation. Some Basic rules which should be remembered with regards to bond are: When the required rate of return equal the coupon rate, the bond sells at par value; When the required rate of return exceeds the coupon rate, the bonds sells at a discount. The discounts declines as maturity approaches. When the required rate of return is less than the coupon rate, the bonds sells at a premium. The premium declines as maturity approaches. The longer the maturity of a bond, the greater is its price change with a given change in the required rate of return.
2	Explain why a company may want to issue bonds as a source of financing. What potential benefits might the issuance of bonds have over the issuance of equity securities (common stock)?
	Bond financing has following potential benefit as compared to equity issue. Lower cost of capital – The finance cost would be limited to interest paid, since bonds are comparatively less risky the risk premium either less or NIL. Interest on bonds and other debt is deductible on the Company’s income tax return. Dividends on stock are not deductible on the income tax return. Ownership interest in the corporation will not be diluted by adding more owners. Bond financing create wealth for shareholder i.e. by issuing debt, the corporation gets to control a large asset by using other people's money instead of its own. If the asset ends up being very profitable, all of its earnings minus the interest, will enhance the owners' financial position.
3	Explain (in theory – not formula) how the value (issue price) is assigned to bonds/warrants if bonds are issued with warrants.
	Companies can sell bonds with warrants that allow buyers to purchase stock at a certain price, often within a given amount of time. They often follow this strategy when they want to offer bonds at a percentage rate lower than is usual for companies with a similar value or performance rating. Warrants are considered detachable, which means they can be sold or redeemed separately. The price at which the warrant holder can buy shares of stock is called the strike price or exercise price. Most warrants can be traded on financial exchanges, and in some cases companies provide incentives to bondholders who sell or exercise their warrants before the warrants expire. For example, a company may not pay a dividend to a bondholder who still has outstanding warrants. Value is assigned based on the market price of equity share and exercise price of bond with warrant. Value also based on the exercise ratio i.e. per bonds how many equity share required whether the market price of equity share is greater than the exercise price

Kindly do the positive rating.