Long-Term Financing: Bonds
A company can purchase bonds as an investment or can issue bonds as a mechanism to raise capital. It is important to understand the different types of bond issues that a company can use, and the impact of interest rates on those bonds. After this reading, you will be able to explain how a company can use long-term bonds as part of their capital budget.
Comparison with stock
A bond differs from a share of stock in several ways:
- A bond is a debt or liability of the issuer, while a share of stock is a unit of ownership.
- A bond has a maturity date when it must be paid. A share of stock does not mature; stock remains outstanding indefinitely unless the company decides to retire it.
- Most bonds require stated periodic interest payments by the company. In contrast, dividends to
stockholders are payable only when declared; even preferred dividends need not be paid in a particular period
if the board of directors so decides.
- Bond interest is deductible by the issuer in computing both net income and taxable income, while dividends
are not deductible in either computation.