Question

1. Explain 3 advantages of taking a long term debt for an organization.

2. Explain 3 disadvantages of taking a long term debt for an organization.

(Make sure your responses include the significance of "debt to asset ratio")

3. Research any bonds issued by a local government body in your community / state.

a) Identify the bond issuer, the purpose of the bond, the total amount being raised.

b)What is the yield of this bond?

c) When is the maturity date of this bond?

d) What is the rating of this bond? What does this rating mean?

c) What are 3 benefits of investing in this bond?

d) What are 3 drawbacks of investing in this bond?

e) Would you personally buy this bond? Why or why no

Answer 1

Advantages:

1. Debt is least costly source of long-term financing. It is the least costly because interest on debt is tax-deductible,

3. Bondholders are creditors and have no interference in business operations because they are not entitled to vote.

4. The company can enjoy tax saving on interest on debt.

Disadvantages:

1. Interest on debt is permanent burden to the company. Company has to pay the interest to bondholders or creditors at fixed rate whether it earns profit or not. It is legally liable to pay interest on debt.

2. Debt usually has a fixed maturity date. Therefore, the financial officer must make provision for repayment of debt.

3. Debt is the most risky source of long-term financing. Company must pay interest and principal at specified time. Non-payment of interest and principal on time take the company into bankruptcy.