BOND
Bonds are the alternative source of long-term
financing. The other means is the stock which has
been discussed in the previous chapter. Bonds do
not represent equity capital, but they are long-term
liabilities of the company.
BOND
Itis defined as a long-term debt of a firm or the
government set forth in writing and made
underseal.
It is a certificate of indebtedness.
KINDS OF BOND
Government Bonds
Corporate Bonds
GOVERNMENT BONDS
Are those issued by
government to finance its
activities.
CORPORATE BONDS
Are those issued by private
corporations to finance their
long-term funding
requirements.
Like a long-term loan, a bond is a long
term contract under which a borrower
agrees to make payments or interest and
principal, on specific dates, to the holder of
the bond. Unlike long-term loans, a bond
issue is generally advertised, offered to the
public, and actually sold to many different
investors.
BOND AS DISTINGUISHED FROM STOCKS
1. A bond is a debt instrument, while stock is an instrument of ownership;
2. Bond holders have priority over stock holders when payments are made
by the company;
3. Interest payments due to bonds are fixed, while dividends to
stockholders are contingent upon earnings and must be declared by the
board of directors;
4. Bonds have specific maturity date, at which time, repayment of the
principal is due. In contrast, stocks are instruments of permanent
capital financing and does not have maturity dates; and
5. Bond holders have no vote and no influence on the management of the
firm, except when the provisions of the bond and the indenture
agreement are not met.
ALTERNATIVE WAYS OF BOND ISSUANCE
1. Public Offering
involves selling of corporate bonds to the general public
through investment bankers. The investment banker
provides assistance in the issuance of bonds by;
1. Helping the firm determine the size of the issue and
the type of bonds to be issued;
2. Establishing the selling price; and
3. Selling the issue.
2. Private placement
is a sale of bonds directly to an institution and is a private
agreement between the issuing company and the financial
institution without public examination.
ADVANTAGES OF PRIVATE PLACEMENT
1. The issue can be tailor-made to fit the needs of the
issuing firm, as well as the investing firm;
2. The issue does not have to be registered; and
3. There are no underwriting fees paid by the issuing
firm.
3 CLASSES OF BONDS
1. By type of security;
2. By manner of participation in
earnings; and
3. By method of retirement or
repayment.
Bonds may be classified according to the type of security offered by the issuing firm. These
consist of the ff:
1. Earnings and general unpledged assets of issuing company
(debentures)
2. Earnings of issuing company plus pledge of specific property (mortgage
bonds). This is further classified as follows:
a) Real estate mortgages (senior and junior liens)
i. Closed-end Issues
ii. Open-end issues
b) Chattel Mortgages
3. All or some of original security plus general credit of another company
which may be:
a) Assumed bonds
b) Guaranteed bonds
4. Combined earnings of allied companies plus collateral protection in
some cases (joint bonds).
DEBENTURES BONDS
are general credit bonds not secured by specific property. The earning
power of the issuing corporation provides the protection to the
debenture bondholder. The claim of the debenture bondholders is
superior to any stockholder regarding unpledged property of the
issuing corporation.
MORTGAGE BONDS
are those which are secured by lien on specifically named property
such as land, buildings, equipment, and other fixed assets. Mortgage
bondholders have a prior claim to the assets specifically pledged as
security.
The specific property pledge are of two
general types:
1. Real estate – consist of land and
property attached to the land.
2. Chattels – consist of personal and
movable property.
BONDS
By Type of Security
Assumed Guaranteed
bonds bonds
Joint
Real estate Chattel
bonds
mortgage
Guaranteed Bonds
is a type of bond in which the payment of interest, or principal, or both is
guaranteed by one or more individuals or corporation.
Joint Bonds
there are times when a property is owned jointly by several companies. The same
company may be used as security for a bond issue. The companies bind themselves
jointly as debtors in this type of issue. Bonds falling under such type of issue are
called joint bonds.
CLASSIFICATION OF BONDS BY PARTICIPATION IN
EARNINGS
1. Bonds with fixed contractual interest rates in which there are two types:
a. coupon bonds; and
b. registered bonds.
2. Bonds with fixed contractual rate with payment contingent upon earnings
(income bonds).
3. Bond with fixed contractual rate with participating feature of which there are four
types;
a. participating bonds
b. convertible bonds
c. bonds with warrants
d. bonds with junior security attached.
BONDS
By manner of participation in earnings
Income bonds
Serial bonds
Perpetual
bonds
Sinking bonds
Repayment of Repayment of
principal on set principal on
date periodic basis
Callable
bonds
Serial Sinking fund
bonds bonds
Convertible
bonds