Learning Objective # 2 Discuss why corporations issue bonds. LO#2

Why Corporations Sell Bonds  To borrow money to pay for major purchases  Difficult or impossible to sell stock  Finance ongoing business activities  To get money to operate or expand  The interest paid to bondholders is a tax deductible business expense LO#2

Four Types of Corporate Bonds  Debenture Bond  Most corporate bonds are debenture bonds  Backed only by the reputation of the issuing company  Mortgage Bond  A corporate bond that is secured by various assets of the issuing firm LO#2

Four Types of Corporate Bonds  Subordinated Debenture Bond  An unsecured bond that gives bondholders a claim secondary to that of other designated bond holders with respect to interest payments and assets  Convertible Bond  Can be exchanged, at the owner’s option, for a specified number of shares of common stock LO#2

Provisions for Repayment Call Feature  Corporation can call in or buy back outstanding bonds from current bondholders before the maturity date.  Most agree not to call bonds for the first 5 to 10 years after they are issued.  They call bonds if the interest rate they are paying you is very much higher than the going rate.  Most corporate bonds and municipal bonds are callable. LO#2

Provisions For Repayment  Sinking fund  A fund to which annual or semi- annual deposits are made for the purpose of redeeming a bond issue  Serial bonds  One issue of bonds that mature at different dates LO#2

Other Types of Bonds  Domestic, Foreign & Eurobonds  Issued in the country and currency of the issuer  Units  Two or more corporate securities bundled by an investment dealer and sold at an overall price  Strip Bonds  Coupons and bonds are sold separately at significant discounts LO#2