The bond issuance
Chapter Summary
The chapter outlines all aspects of bonds trading, including market determination, bond issuance, and redemption, among other elements of long-term liabilities. In this regard, it begins by defining a bond as an interest-bearing form note that an organization or agents of corporations issues to people.In some instance, bonds exhibit characteristics of stock since they are both sold in small denominations, which attracts many individuals to buy and invest in the business. Although bond trading may exhibit similar characteristics, some features tend to differentiate one bond from the other. On this note, the authors use this chapter to elaborate the various types of bonds such as secured and unsecured bonds, and convertible and unconvertable bonds.Further, this chapter illuminates on the bond issuance processes and expounds on the entire bond trading, employing several examples for further understanding.
The bond issuance procedures begin from the government’s approval, which allows a company to start issuing bonds.After the authorization of the federal law that enables the cooperation to issue bonds, its stakeholders and board of directors authorize the bond trading process outlining the issues such as the number of bonds that the firm can allow, contractual interest rates, and total face values. In most cases, the number of bonds that an organization is authorized to distribute is higher compared to the number issued. This aspect enhances the flexibility of the business since the company possesses an allowance tom to enable it to meet the speculated cash requirements in future.
According to the authors, the face value, maturity date and contractual interest rate serve as the primary policies that determine how the entire bond business is conducted. These terms govern the issuance of bonds in a specific firm, and they are outlined in a bond indenture, which serves as a legal document for the bond issuance process.Notably, this document is different from the bond certificate and summarizes the details, agreements and rights of all bondholders. It also outlines the obligations of the individual company and the involvement of trustees in the process. In most cases, the trustees here are financial institutions obligated to keep the records of each bondholder. Besides, the unissued bonds remain in the custody trustees and maintain custody of conditional title to the property that the client pledged.
The other element on bonds that the chapter elaborates includes bond trading, which provides the client with the freedom to convert their possession into cash at their convenient time. In this case, one can sell his/her bonds at a price based on the prevailing levels on national securities exchanges. The prices of bonds are set as a percentage of the face value, which, in most cases, the percentage translates an amount of $1,000.The media platforms, such as newspapers and financial press, strive at publicizing thebong prices and daily trading activities of bonds. In this regard, a corporation makes daily journals about the progress of its bond business, outlining the dates when it will be buying or issuing out bonds. The financial press or newspapers also describes when bondholders could convert bonds into cash.
Furthermore, the chapter also touches on the strategies that a company can use to determine the market prices of bonds. Since corporations work hard to position their financial reputation in a favourable condition to attract more investors, they need to entice more buyers of their bonds. This chapter outlines that firms must use appropriate marketing and pricing strategies to ensure that investors purchase the bonds as expected to enhance their financial growth. For a firm to establish an effective price market determination of its obligations, managers need to analyze the time value of money, which is used to deduce the relationship betweenmoney and time. On this note, the authors emphasize that a dollar promised to be received in future is far less worth compared to a dollar earned today.This principle is essential in calculating the market value of a bond. The policy helps to deduce the present value or the market price of a bond that should be sold at the marketplace. The current value, therefore, serves as a function of the three primary aspects that control the market. The three primary factors include the length of time, the dollar amount to be received, and the market interestrates.
The methods for accounting for bond transactions also another element that this chapter covers. According to this aspect, a corporation need to understand the computation of bond transactions to enable it to track its business activities effectively. The Booking keeping records must have the names of each bondholder alongside the details of the deals that the customer has done. This concept helps a business to understand the profitability of its bond trade and help in solving some issues that may emerge during auditing. The accounting for bond transactions also allows managers to know whether they should sell bonds at a discount to entice more buyers or forego the option. The authors also use this chapter to explain more about how firms issue bonds at face value and issuance at a discount.