Question

a) describe what a bond is?

b) for the issuer of the bond, why would they prefer to issue bonds over shares?

c) on a balance sheet should a bond be classified as liabilotu or equity?

Answer 1

Question :a) describe what a bond is?

Ans.: A Bond is a written contract between two parties. Bond is in a documents form that the holder is owner of specified sum of money as per denomination. Companies or Governments issue bonds as and when they are in need of funds.. They issue bonds and investors buy them. Bonds are normally issed for specific period based on the credit rating by speicified agencies. Investors buy or say Invest in Bonds for fixed income. On completion of period, the money is paid back alongwith interest payable amount as per coupon rate/interest rates.

Question: b) for the issuer of the bond, why would they prefer to issue bonds over shares?

Ans.: The basic reason behind Bond issue are the funds requirements timing, either it may be a long term or short term. For Long term purposed while companies prefer to issue share which dont bear interest rates, while for shorter terms always bonds issues are preferable mode of fund raising by Companies & Govt. normally. Some Companies prefer to issue Bonds for fund raising instead of Shares to maintain low equity in the market to get more Investors attention. Normally the dividend ratio is more than that of Bond rate of interest, this is also one the reason behind bond issue preference.

Question: c) on a balance sheet should a bond be classified as liabilotu or equity?

Ans.: On a Balance Sheet, Bonds are always classified as Liability until these are repaid with interest.