Question

Explain why issuing bonds is a form of financing a corporation. Include in your explanation the circumstances upon which a bond may be callable and when a bond may be convertible.

Answer 1

When a bond is issued, the bondholder i.e. the one purchasing the bond pays cash to the company. It gives the corporation the cash flow to finance its operations. In return the corporation has to pay interest at regular intervals and the par value at maturity.

A callable bond is one which can be redeemed by the issuer before maturity. A call premium needs to be paid for this purpose.

A bond is convertible when it can be converted into a specific number of common shares by the issuing company. It can also be converted into cash of equivalent value.