Investment media includes bonds and debentures. This form of investment needs of a risk avertor who is primarily interested in steady returns. Coupled with the safety of the principal sum.
Definition of bond
A debenture is a legal document containing an acknowledgment of indebtness by a company. It contains a promise to pay a stated rate of interest for a defined period. Repay the principal at a given date of maturity.
Bond is a formal legal evidence of a debt and are termed as the senior securities of a company.
Why issuing bonds
The government has no choice but he borrows when they are unable to meet their express from the current revenue corporation. On the other hand, have a wider choice in the matter of financing their operation. Retained earnings, new equity issues, etc. They still prefer to go in for borrowing for the following reason.
1) To reduce the cost of capital ->Bonds are the cheapest source of financing. A corporation is willing to incur the risk of borrowing in order to reduce the cost of capital. Financing a portion of its assets with securities bearing a fixed rate of return of increasing the ultimate return to the equity holder.
2)To gain the benefit of leverage->Presence of debt and preference share in the company’s financial leverage. When financial leverage is used changes in earnings before interest and tax(EBIT) translate into the larger changes in earning per share. If EBIT falls and financial leverage is used the equity holders endure negative changes in EPS that are larger than the negative decline in EBIT.
3)To effect tax-saving-> The interest on bonds is deductible in figuring up corporate income for tax purposes, Hence the Eps increase. If the financing is through bonds rather than with preference or equity share.
4) To wider, the source of a funds->The corporation can attract fund from individual investor and especially from those investing institutions which are reluctant or not permitted to purchase equity share.
5)To preserve control->An increases in debt does not diminish the voting power of present owners since bonds ordinarily carry no voting right.
Types of Bonds
1) Sinking fund bonds->Sinking fund bonds arise when the company decides to retire its bond issue systematically by setting aside a certain amount each year for the purpose.This person the users the money to call the bonds annually at some call premium or to purchase then or the open market if they are selling at discount.
2)Mortgage or secured bonds ->The term mortgage generally refers to a lien on real property or buildings mortgage bonds may be an open-end close end and limited open-end. An open-end mortgage means that a corporation under the mortgage may issue additional bonds.
In close end mortagage the company agrees to issue at one time a stated amount of bonds.
In a limited open-end mortagage.The indenture provides that corporation may issue a stated amount of bonds over a period of years in series.
3)A convertible and non-convertible bonds->A convertible bond is a cross between a bond and a stock.The holder can at his option convert the bonds into a predetermined number of shares of common stock at a predetermined price. In all convertible bonds, the indenture contract specifies the term of conversion and the period during which the conversion privilege can be exercised.
4)Serial bonds->Serial bonds are appropriate for companies that wish to divide their issues into a series each point of the series maturing at a different time ordinarily the bonds are not callable and the company pay each part of the series as it matures.|
5)Collateral trust bonds->Collateral trust issues are secured by a pledge of intangibles usually in the form of stocks and bonds of a corporation collateral trust issue are thus secured by
a)Shares, representing ownership incorporation.
b)Bonds, representing the indirect pledge of assets or a combination of both, usually, the pledged securities are those of other corporations. The shares pledged frequently represent a contract of a subsidiary corporation and such control often materially adds to or detracts from the intrinsic value of collateral issues secured thereby.
6)Convertible and Non-convertible bonds-Convertible bonds can be one of the finest holdings for the investor looking for both appreciations of investment and income of bonds. A convertible bond is a cross between a bond and a stock. Convert the bond into a predetermined number of shares of common stock at a predetermined price.
7)Income bonds->Income bonds on which the payment of interest is mandatory only to the extent of current earnings.If earnings are sufficient to pay only a portion of the interest that portion usually required to be paid. Income bonds are not offered for sale as new financing but are often issued in reorganization or recapitalization to replace other securities.
8)Adjustment Bonds->Adjustment issued in the reorganization of companies in financial difficulties. In practically all cases, interest is payable only if earning permits. They are the leading type of income bond.
9)Assumed bonds->Assumed bonds issued in the reorganization of companies in financial difficulties. In practically all cases, interest is payable only if earning permits. They are a leader type of income bond.
10)Adjustment bonds->Adjustment bonds issued in the reorganization of companies in financial difficulties. In practically all cases interest is payable only if earning permit. They are lading types of income bonds.
11)Joint bonds->Joint bonds are loan certificates that is jointly secured by two or more companies,two companies that use a common facility, and have raised money to finance. It through the sale of debt would provide a good example of a situation where the bonds might jointly secure.
12)Guaranteed bonds->Bonds may be guaranteed by a firm other than the debtors. Some guarantors assure payment of both principal and interest only. A guaranty or lease contract will add assurance to a bond if the guarantor or lessee is financially strong.
13)Redeemable and irredeemable bonds->A redeemable debenture is a bond which issued for a certain period on the expiry of which its holder will be repaid the amount thereof with or without premium. A bond without the redemption period is termed as an irredeemable debenture.
14)Participating bond->Companies with poor credit position issue participating bonds. They have a guaranteed rate of interest but may also participate in earning up to an additional specified percentage.