Comparison between Bonds And Stock Equity

Essay by mba_studentUniversity, Bachelor'sB, November 2006

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Advantages of bonds:

* Bonds are debt, not equity, so the ownership and control of the company are not diluted.

* Tax-deductible in interest expense.

* The low interest rates on bonds allow for positive financial leverage.

Advantages of a corporation

* Simple to become an owner

* Easy to transfer ownership

* Provides limited liability

Disadvantages of bonds:

* Risk of bankruptcy; the debt must be paid back regularly, or creditors will force legal action.

* Negative impact on cash flows.

Stockholder's rights

* Voting (in person or by proxy).

* Proportionate distributions of profits

* Proportionate distributions of assets in a liquidation

Characteristics of Bonds Payable

* When issuing bonds, potential buyers of the bonds are given a prospectus.

* The company's bonds are issued to investors through an underwriter.

* The trustee makes sure the issuer fulfills all of the provisions of the bond indenture.

Types of Capital Stock

Common Stock

* Basic voting stock

* Ranks after preferred stock

* Dividend set by board of directors

Preferred Stock

* Preference over common stock

* Usually has no voting rights

* Usually has a fixed dividend rate

Treasury Stock

* No voting or dividend rights

* Contra equity account

Bond Classifications

* Debenture bonds Not secured with the pledge of a specific asset.

* Callable bonds May be retired and repaid (called) at any time at the option of the issuer.

* Redeemable bonds May be turned in at any time for repayment at the option of the bondholder.

* Convertible bonds May be exchanged for other securities of the issuer (usually shares of common stock) at the option of the bondholder.

Stock Classifications

Authorized Shares The maximum number of shares of capital stock that can be sold to the public.

* Issued shares are...