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What are the key features of a bond that a company might issue?
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A bond typically has a face value, a specified interest rate (coupon rate), and a maturity date for repaying the principal.
How does a company’s balance sheet change when it opts for equity financing?
The company issues more shares, increasing total equity and the number of shareholders. The equity side of the balance sheet increases due to the additional funds raised.
In the context of bonds, what is a coupon payment?
A coupon payment is the periodic interest payment made to bondholders, typically paid semi-annually or annually.
What is a bond from the perspective of an individual investor?
A bond is a way for an individual to participate in lending to a company, essentially becoming a partial lender.
What happens to bondholders if a company performs poorly financially?
Bondholders still receive their fixed interest payments, as these obligations must be met before profit distribution to shareholders.
How does debt financing like bonds differ from equity financing in terms of profit distribution?
Debt financing requires fixed interest payments that are paid before any profit distribution, whereas equity financing involves sharing profits with shareholders.
Identify one major risk of equity financing for current shareholders.
Issuing more shares dilutes the ownership and future profit share of current shareholders.
Contrast the return expectations for equity holders and bondholders.
Equity holders expect a share of profits (which can vary), while bondholders receive fixed interest payments.
Describe the relationship between bondholders and interest payments.
Bondholders receive fixed interest payments at regular intervals (considered an expense), regardless of the company's financial performance.
What are the primary motivations for a company to issue bonds?
To raise funds for expansion or other financial needs without diluting ownership or increasing equity, and to pay fixed interest to lenders instead of sharing profits with shareholders.
Explain how bond payments would be structured for a bond with a 10% annual coupon and a 2-year maturity.
Bondholders would receive $50 every six months, and the final payment would include $50 plus the principal ($1,000) at maturity.
How might a company structure its bond issuance if it wishes to raise $5 million?
The company could issue 5,000 bonds, each with a face value of $1,000 and set interest rates/coupon payments according to market rates.
Explain the term 'maturity date' as it pertains to bonds.
The maturity date is when the issuer must repay the bond's face value to the bondholder.
Why might a company prefer issuing bonds over taking a traditional bank loan?
Issuing bonds allows the company to raise large amounts from multiple investors and often at potentially lower interest rates than bank loans.
How are interest payments for bonds typically treated within a company's financial statements?
Interest payments are treated as expenses in the financial statements.
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