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Describe how companies use bonds to purchase assets they do not currently have the cash to...

Describe how companies use bonds to purchase assets they do not currently have the cash to purchase. Describe how bonds could be used to further a company's business. Discuss also how bonds could lead to trouble if not properly handled.

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Answer #1

Bond: Bond is a fixed Interest bearing instrument which is used by companies for raising the money from the marker. The main feature is fixed Interest and specified maturity date.

Use of bonds: By issuing the bonds, company can raise the money and the same can be used for investing purpose. Which means they purchase the assets for generating future cash flows. By investing in the projects which generate the returns more the bond interest rate, company can expand its business.

Cash Flow:

When bonds issued                     - Cash Inflow

When assets purchases              - Cash outflow

Obligations attached to Bonds:

  1. The main obligation is Fixed payment of Interest every period- If Company is unable to generate the Inflows from the assets , then it may default the payment of Interest. Which leads to the cutting in the credit rating and loosing credibility in the market.
  2. Irrespective of the generation of the cash profit, Company should discharge the maturity values on the due date which create stress on the cash flows.

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