Finance.

Bonds and risk

Bonds generally refer to a form of borrowing representing a debt obligation on the part of the issuer (Greenspan, A. 2010). For instance, a company issues a bond of a particular stated amount maybe, to finance its key operating activities such as buying property and equipment, research and development or hiring of expert employees; then by doing so the amount of money they get in return out of this issue is simply a loan that they have to repay over an agreed stated period of time during the bond issue. Bonds are associated with an interest rate referred to as a coupon or bonds yield (Washington State Historical Society. 1904). Also, referred to as fixed income securities, the buyers of a bond are able to anticipate the total exact amount of money they will have received if they hold the bond to maturity. For instance, if someone buys a corporate bond with a stated face value of $100, with a coupon rate of 5% paid semi annually and maturity of 10 years, he shall simply receive $5($100*0.05) as interest per annum for 10 years and at the end of this 10th year he gets back the amount paid as the face value of $100.

Microsoft, a renowned technology company, is one of the company’s in the United States that has recently issued and raised money out of a corporate bond financing. From this sale, early this year 2017, Microsoft was able to raise a total of $17 billion what has so far stood as the largest corporate bond sale. This issue was aimed at financing Microsoft’s general corporate activities such as share buybacks and other capital expenses. This issue had a debt maturity ranging from as low as three years to a forty year maturity period.

It’s of great advantage for a company to raise finance through issuance of bonds other than other forms of financing such as issuing of shares. Some of these arising advantages include;

· Bonds do not result to the dilution of ownership value of the existing shareholders unlike in a case where a company raises capital from issuance of additional shares on top of the existing ones. Shares represent ownership to a given stake in relation to the company’s value and so, a shareholder of a company automatically assumes certain ownership rights including inspection of the books of accounts, attending annual general meetings of the company and participating in voting during these annual general meetings. Shareholders also automatically assume the right of entitlement to company dividends when they are announced (Kennedy, J. C., President's Commission on School Finance, Washington, Dc., & Battle (Mark) Associates, Inc., Washington, Dc. 1971). This is a very different case from bond issuance since a holder or buyer of a particular issued bond do not in any way have ownership rights to the company but remains as lenders or creditors of which the company owes an obligation.

· Bonds enable more amounts of cash to be retained in the business for a relatively long period of time in the company or business. This is because the period of redeeming the bond after the issuance date may be very many years. Definitely before repayment of the face value of the bond by the company, it will have the benefit of more years doing business with the borrowed funds.

· Bonds are less volatile than other forms of security such as equity thus many investors are more than ready to invest in bonds as soon as they are issued as they view them as safer security to invest in. In relation to this, in most cases bonds pay higher returns as on interests as compared to generally to the dividends paid on shares or other forms of equities.

· Bonds are greatly secured by law of many countries and so holders of these securities will often receive some amount of their money back in case a company goes bankrupt. A contrast with equity stock is that in case of bankruptcy of the company, the equity stock may end up as valueless.

· Bonds are highly liquid as compared to equity stock. For instance, it is very easy for a given institution to sell a big quantity of bonds without necessarily affecting the price a feature that is so challenging with equity stock.

Bonds however, are associated with certain disadvantages and risks that have to be put into consideration some of which include;

· Bonds are associated with regular fixed interest payments to the bondholders which present a great liability to a company that is only making loses. This is because the bond interests have to be paid together with other liabilities irrespective of the financial standing of the company (Macchiarola, F. J., & New York City Partnership. 1985). Dividends on shares don’t have to be paid during loses but the company can retain its earnings and pay dividends in future.

· Bondholders may impose certain restrictions in form of bond covenants on the business operations in an attempt to limit the risk on their financing because they are lending their money for a relatively long period of time.

References

Kennedy, J. C., President's Commission on School Finance, Washington, Dc., & Battle (Mark) Associates, Inc., Washington, Dc. (1971). Big City Schools in America: The Views of Superintendents and School Board Presidents.

Macchiarola, F. J., & New York City Partnership. (1985). Speeches and papers of Frank J. Macchiarola, President and Chief Executive Officer of the New York City Partnership, Inc.

Washington State Historical Society. (1904). Women’s Club of Tacoma records. Washington State Historical Society.

Greenspan, A. (2010). Statements and speeches of Alan Greenspan.