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Bonds and Bond Valuation

Bonds and Bond Valuation

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Published by kawall

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Published by: kawall on Aug 29, 2009
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12/16/2012

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Differences Between Debt and Equity
Debt
 –  Not an ownership interest – Creditors do not havevoting rights – Interest is considered a costof doing business and is taxdeductible – Creditors have legalrecourse if interest or  principal payments aremissed – Excess debt can lead tofinancial distress and bankruptcy
Equity
 – Ownership interest – Common stockholdersvote for the board of directors and other issues – Dividends are notconsidered a cost of doing business and are not taxdeductible – Dividends are not aliability of the firm andstockholders have nolegal recourse if dividends are not paid – An all equity firm can notgo bankrupt
 
 
The Bond Indenture
Contract between the company and the bondholders and includes
 – The basic terms of the bonds – The total amount of bonds issued – A description of property used as security, if applicable – Sinking fund provisions – Call provisions – Details of protective covenants
 
 
Bond Classifications
Registered vs. Bearer FormsSecurity
 – Collateral – secured by financial securities – Mortgage – secured by real property, normally land or  buildings – Debentures – unsecured –  Notes – unsecured debt with original maturity less than10 years
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