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Bonds are the alternative source of long-term
financing. The other means is the stock which has
been discussed in the previous chapter. Bonds do
not represent equity capital, but they are long-term
liabilities of the company.
Itis defined as a long-term debt of a firm or the
government set forth in writing and made
It is a certificate of indebtedness.
Government Bonds
Corporate Bonds
Are those issued by
government to finance its
Are those issued by private
corporations to finance their
long-term funding
Like a long-term loan, a bond is a long
term contract under which a borrower
agrees to make payments or interest and
principal, on specific dates, to the holder of
the bond. Unlike long-term loans, a bond
issue is generally advertised, offered to the
public, and actually sold to many different
1. A bond is a debt instrument, while stock is an instrument of ownership;
2. Bond holders have priority over stock holders when payments are made
by the company;
3. Interest payments due to bonds are fixed, while dividends to
stockholders are contingent upon earnings and must be declared by the
board of directors;
4. Bonds have specific maturity date, at which time, repayment of the
principal is due. In contrast, stocks are instruments of permanent
capital financing and does not have maturity dates; and
5. Bond holders have no vote and no influence on the management of the
firm, except when the provisions of the bond and the indenture
agreement are not met.

1. Public Offering
 involves selling of corporate bonds to the general public
through investment bankers. The investment banker
provides assistance in the issuance of bonds by;
1. Helping the firm determine the size of the issue and
the type of bonds to be issued;
2. Establishing the selling price; and
3. Selling the issue.
2. Private placement
 is a sale of bonds directly to an institution and is a private
agreement between the issuing company and the financial
institution without public examination.
1. The issue can be tailor-made to fit the needs of the
issuing firm, as well as the investing firm;
2. The issue does not have to be registered; and
3. There are no underwriting fees paid by the issuing
1. By type of security;
2. By manner of participation in
earnings; and
3. By method of retirement or
Bonds may be classified according to the type of security offered by the issuing firm. These
consist of the ff:
1. Earnings and general unpledged assets of issuing company
2. Earnings of issuing company plus pledge of specific property (mortgage
bonds). This is further classified as follows:
a) Real estate mortgages (senior and junior liens)
i. Closed-end Issues
ii. Open-end issues
b) Chattel Mortgages
3. All or some of original security plus general credit of another company
which may be:
a) Assumed bonds
b) Guaranteed bonds
4. Combined earnings of allied companies plus collateral protection in
some cases (joint bonds).
 are general credit bonds not secured by specific property. The earning
power of the issuing corporation provides the protection to the
debenture bondholder. The claim of the debenture bondholders is
superior to any stockholder regarding unpledged property of the
issuing corporation.
 are those which are secured by lien on specifically named property
such as land, buildings, equipment, and other fixed assets. Mortgage
bondholders have a prior claim to the assets specifically pledged as
The specific property pledge are of two
general types:
1. Real estate – consist of land and
property attached to the land.
2. Chattels – consist of personal and
movable property.
By Type of Security

Earnings and Earnings plus Combined Earnings

All or Some of
General Pledge of Specific of Allied
Original Security
Unpledged Property Companies plus
plus General
Assets Collateral
Credit of another
Company protection in some
Debentures bonds

Assumed Guaranteed
bonds bonds

Real estate Chattel

Closed- end Open- end

issue issue
2 Classification of Real estate mortgage
according to priority of claims
1. Senior liens- those having prior claim to fixed
assets pledged as security. Bonds with senior liens
are also sometimes called first mortgage bonds.
2. Junior liens- bond having subsequent liens to fixed
assets pledged as security. They have a
subordinated priority claim to the senior liens.
Bonds with senior liens are also sometimes called
second mortgage bonds.
Classification of Real estate according to type of issue
1.Closed-end Issue
this type of issue refers to those wherein subsequent issues on the specific
property pledged as collateral are not allowed.
2. Open-end Issue
this type of bond issue permits the issuance of additional bond issues or
series to be made under the original mortgage secured by a single lien.
(usually characterized by series bonds)
3.Limited open-end Issue
this is an improvement of the open and closed issues allowing additional
bonds to be sold after a maximum amount. It becomes closed when the
specified amount of bonds have been issued.
Assumed Bonds
there are times when a corporation buys another corporation, or is merged with
another. The liabilities of deceased corporation are “assumed” by the surviving
corporation. These bonds, by virtue of such assumption, are referred to as assumed
bonds. They remain unchanged in form and will continue to enjoy the protection of
any mortgage lien originally given.

Guaranteed Bonds
is a type of bond in which the payment of interest, or principal, or both is
guaranteed by one or more individuals or corporation.

Joint Bonds
there are times when a property is owned jointly by several companies. The same
company may be used as security for a bond issue. The companies bind themselves
jointly as debtors in this type of issue. Bonds falling under such type of issue are
called joint bonds.
1. Bonds with fixed contractual interest rates in which there are two types:
a. coupon bonds; and
b. registered bonds.
2. Bonds with fixed contractual rate with payment contingent upon earnings
(income bonds).
3. Bond with fixed contractual rate with participating feature of which there are four
a. participating bonds
b. convertible bonds
c. bonds with warrants
d. bonds with junior security attached.
By manner of participation in earnings

Fixed Fixed contractual rate Fixed contractual

with payment rate with
contingent upon participating
interest rate
earnings feature

Income bonds

Participating Bonds with

Convertible Bonds with
bonds Junior Security
bonds warrants
Coupon bonds
these are bonds having attachments of a series of post dated certificates
(coupons)payable to the bearer for the interest over the life of the bond.
Registered bonds
these are bonds wherein the names of the owners are recorded on the transfer books
of the company. The owners receive payments for interest and principal by checks
in their favor.
Income bonds
are debt instruments with a fixed rate of interest payable only if earned and declared
by the board of directors.
Participating bonds
are bonds which stipulate a fixed coupon rate but which also provide a method of
receiving additional income over and above the minimum sum.
Convertible bonds
are generally debenture bonds or junior-lien mortgage bonds wherein the owner has
option to exchange his bond for a specified number of shares of common stock, or less
frequently, preferred stock, or other types of bonds.
Bonds with warrants
bonds may also have warrants, attached to them. Warrant is an option or a right,
exercisable by its holder, to purchase stock at a stated price during a stipulated period of
Bonds with Junior Security Attached
are bonds which are issued along with some share of stock in a package or block sale.
The effect of this arrangement is that the bondholders have the opportunity of sharing
with the stockholders whatever dividends are declared.
BONDS by method of retirement

Repayment of Bonds with

principal on Repayment of full No set of
responsibility of
periodic basis principal on set date maturity date
advance retirement

Serial bonds
Sinking bonds

Repayment of Repayment of
principal on set principal on
date periodic basis

Serial Sinking fund
bonds bonds

Callable Convertible Callable Convertible

bonds bonds bonds bonds
Serial bonds
is one among group of bonds a part of which mature semi-annually or annually
instead of all on a single date. The effect of the maturity in series is the staggered
repayment schedule of the obligation.
Sinking Funds Bonds
bonds may also be gradually retired with the provision of a sinking funds. This
provision requires the issuer to deposit annually certain sums of money with the trustee
of the issue for the retirement of the part of the issue before maturity.
Callable bonds
are bonds with provisions that the terms of the issue can be cancelled or called. The
call privilege enables the issuing company to pay off a bond issue prior to maturity.
Convertible bonds
are bonds which may be exchanged for the common stock of the issuing corporation at
a fixed price, at a pre-determined redemption date, and at the option of the bondholder.
Perpetual bonds
are bonds which cannot be redeemed by demanding repayment. This type of bond has
no place in the finance of private businesses.
Bonds are used as instruments of long-term financing for any of the ff. reasons.
1. When a franchise or a license is issued to a corporation providing a guarantee of a
certain return on capital investments;
2. When economic conditions allow the payment of interest at a rate lower than what is
paid to common stock in the form of dividends;
3. When the present owners of the corporation want to retain their share of the voting
4. When investor resistance to the purchase of common stock is very strong; and when
such resistance is not found in the sale of bonds;
5. When the degree of safety offered by the issuer attracts investors;
6. When tax advantages are derived from the exercise; and
7. When there is a sufficient demand from institutional investors like banks, insurance
companies, and pre-need firms.
it is a contract between the corporation and the trustee on behalf
of the bondholders. The indenture contains the terms of the bond
issue covering the obligations of the corporation, the manner of its
fulfilment, the rights and responsibilities of the bondholders, and
the duties of the trustee. When the contract includes a trustee, it is
called trust indenture.
Specific contents of indenture are the ff.
1. The amount, duration, and denomination of the bond issue;
2. If applicable, the serial issues and the size of each issue;
3. The rate of interest, the terms of payment, and the designated place of
4. The rights, privileges, or limitations attached to the issue;
5. The type of security and its terms;
6. The terms and conditions of mortgage or pledge of securities, if any;
7. The manner of redemption;
8. The remedies available to bondholders in case of default of the issuing
9. The replacement of mutilated or lost bond certificate; and
10. The duties and remunerations of the trustees.
 is a person who handles monies or property on behalf of
another in trust. The role of the trustee in a bond issue is to see
that the issuing corporation complies with the provisions in the
 The trustee is appointed prior to issuance of bonds to protect
bondholders. He sees to it that the company is able to pay
interest and principal on due dates.
CBZ corp. is authorized to issue 100 bonds with face value of
10,000.00 on January 1, 1993. The bonds will mature after 5 years
and interest of 8% is payable annually every January 1st. This means
that an investor may buy at least one bond and that he shall be paid
annual interest of P800 regardless of the issue price. He can collect
the face value of 1,000.00 on maturity data, January 1, 1997. the
debtor corporation’s total bond liability shall be 1,000,000.00 or (100
x 10,000.00) and annual interest payments must total 80,000.00.
The duties of the trustee are the ff.
1. To represent the bondholder in case of default;
2. To make payment interest and principal;
3. To take care of the sinking fund;
4. To report annually to the bondholders on his operations and the condition
of the bond issue and its pledge security;
5. To supply list of bondholders to any bondholder, enabling the
bondholders to form special committees to protect their interest at any
6. To notify the bondholders of any default; and
7. To inform bondholders of any loans by the trustee to the corporation.
The bond is an alternate source of a long-term financing.
the long term debt of a firm or the government which is set forth in writing and
under seal is referred to as a bond.
BONDS ARE OF TWO KINDS; (1) government bonds, and (2) corporate
Bonds are distinguished from stocks in terms of: (1) classification as an
instrument; (2) priority over stockholders when payments are made;
(3)earnings; (4) maturity; and (5) voting rights.
Bonds are issued either in a public offering or private placement. Both have
their own unique and distinct advantages.
Bonds may be classified into three general types: (1) by type of security; (2) by
manner of participation in earning; and (3) by method of retirement or
The contract between the issuing corporation and the
trustee in behalf of bondholders is called Indenture. It
contains the term of the bond issue covering the obligations
of the corporation, the manner of its fulfilment, the rights
and responsibilities of the bondholders, and the duties of
the trustee.

The role of the trustee in a bond issue is to see that the

issuing corporation complies with the provisions in the