Bonds - Essay Example

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Issuing bonds and issuing equity are therefore two different options available to firms to exercise when requiring expanding. Bond issue is relatively…
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Download file to see previous pages Bonds carrying premium are issued at a price above the face value of the bond whereas bonds issued at discount are normally below the face value of the bond.
There are various reasons as to why the bonds are normally issued at face value, or at discount or at premium and this largely depends upon the different circumstances. If the overall reputation and creditworthiness of the firm is relatively good in the market and investors have relatively better expectations of the future performance of the firm than the firm may be able to sell its bonds at premium. Selling on premium may also be because of the fact that existing bond issues having similar risk characteristics may be offering lower interest rates therefore by if the issuer is willing to offer higher rate of return to the lenders than it may be possible that the bond will be issued at premium.
Similarly, bonds may be offered at discount because issuing firm may not enjoy the relatively better credit ratings in the industry and investors are not willing to put more money into the firm. Selling at discount can also be due to the fact that overall yield offered by the bond may be significantly lower than the existing bonds of same risk category thus investors, in order to get compensated for the opportunity forgone to earn higher interest demand from issuing firms to offer their bonds at discount. (Navarro, 2003)
Finally issuing bonds at face value indicates the indifference of the investors towards the company i.e. investors may not have relatively more trust in the future prospects of the company and may be expecting to earn normal rate of returns on their investment. Selling at face value does not however mean that the firm is not doing well or may be facing difficulties in future but in actual it indicates the ability of the firm to match its offerings according to the market expectations.
There are different reporting requirements for bonds issued at premium, discount and face ...Download file to see next pagesRead More
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