Question

How do bonds provide financing to corporations for their capital projects?

What are the key differences between using bonds to finance capital projects and using stock for that purpose?

The value of a bond is dependent primarily on two factors. Name and explain these factors.

Compare and contrast the differences between stocks and bonds

Answer 1

Bonds can be issued by corporate and based on their credit rating the price of bond id fixed and by issuing the bond at that price funds can be raised by corporate and thereafter paying coupons regularly and par value at the end of term of bond.

Difference between bonds and bonds for financing capital projects

1. Fixed coupons are needed to be paid in dividends at regular annually or semiannually. However, dividend on equity are not required to be paid regularly.
2. Interest paid in bonds are tax deductible whereas dividends are not tax deductible.
3. The flotation cost of bond is less as compared to equity.

Value of bond is dependent on Yield till maturity and term of bonds:
1. Higher the YTM lower will be the price of bond as discounting factor increases.
2. Higher the term of maturity lower will be the price of bond

Stocks and Bonds

1. Stock holders are to paid after obligations to bond holders and preference stock holders are paid.
2. Bond increase leverage in the firm however cost of debt is less as compared to cost of equity.

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