Question

what are Bond Capital (Loan Capital) and Share Capital ? and their differences ?

Answer 1

Solution:

Bond capital denote borrowing by a company and represents its loan capital. Capital raised from issuance of bonds carry a fixed rate of interest which the company should pay irrespective of whether profit is earned or not. This interest is paid periodically until the maturity and repayment of bonds. Bondholders are lenders of the company thus if ,interest and borrowed sum is not paid in time bondholders can take legal action against the company.

Share Capital represents the funds raised from issuance of shares of the company. Issuance of shares is the most important method of raising long term funds.Shares are the ownership securities and share capital represents the ownership capital.The capital of a company is divided into a number of equal parts known as shares. Thus, the term share means the interest of a shareholder in the company measured by a sum of money.Share capital can be of two types- equity share capital and preference share capital. Preference share capital carry certain privileges or preferential rights both regarding dividend and return of capital. However , equity share capital does not carry any preferential rights or priority in payment of dividend or repayment of capital .Dividends are paid only when the company earns profit and capital is repaid at the time of winding up of the company after settling all liabilities.

Difference between Share capital and bond capital is:

Criteria	Share Capital	Bond Capital
Cost of capital	Shareholders are paid dividends when there are profits and dividends are declared.	Bondholders are paid interest irrespective of profits.
Rate of interest	Dividends fluctuate with the amount of profits.They are irregular and uncertain.	Rate of interest on bonds is fixed and regular.
Security	Share capital is raised without any mortgage or charge on company's assets.	Bonds are generally issued against the security of certain assets.
Collection Of funds	Share Capital is generally collected in installments.	Bond capital is usually collected in lump sum.
Status of holders	Shareholders are owners of the company.	Bondholders are creditors of the company.
Repayment	Except redeemable preference shares share capital is refundable only at the time of winding up.	Bond capital is repaid in accordance with terms of issue.
Convertibility	Share capital cannot be converted into bond capital.	Convertible bonds can be converted into share capital.