Loan Of Bonds And Preferred Stocks Are Considered Primarily Creditors Of A Business

Convertibles are appealing to investors who are looking for an investment with greater growth potential than that offered by a traditional bond. By purchasing a convertible bond, the investor can still receive

fully or partially a debt unless the equity interest is granted pursuant to existing terms

B. Convertible preferred stock, includes an option for the holder to convert preferred shares into a certain number of common shares. Unlike convertible bonds, convertible preferred stock is considered equity (unless there is a mandatory redemption feature).

The decision to choose the issuance of preferred shares or unsecured notes is balanced not only by the cost of the capital to the bank, but also the characteristics of the instruments themselves. Issuing preferred stock may be advantageous to the current firm's management due to its unique characteristics over ordinary stock, as well as its hybrid status as a financing instrument.

Now, the advantages of debt capital centre on its relative cost. Debt capital is usually cheaper than equity because, the pre-tax rate of interest is invariably lower than the return required by shareholders. This is due to the legal position of lenders who have a prior claim on the distribution of the company’s income and who in liquidation precede ordinary shareholders in the queue for the settlement of claims. Debt is usually secured on the firm’s assets, which can be sold to pay off lenders in the event of default, i.e. failure to pay interest and capital according to the pre-agreed schedule;

Preferred stock has a preferred position in the claim on the income flow of the firms. Preferred stock dividends, usually a fixed rate relative to par value, are paid ahead of common stock dividends. The dividends of preferred stocks are different from and generally greater than those of common stock. Corporate bonds are debt instruments created by companies for the purpose of raising capital. They are called fixed-income securities because they pay a specified amount of interest on a regular basis. Preferred and Common stocks have three major risk factors: 1) dividend suspension or company failure, 2) rising interest rates, 3) low trading volumes. Most corporate bonds are debentures, meaning they are not secured by collateral. Investors of such bonds must assume not only interest rate risk but also credit risk; they chance that the corporate issuer will default on its debt

Many of the large corporations have gotten loans from banks in order to finance their operations and to raise capital. The creditors hence have a say with regard to the financial contracts and in case the firm goes down, the creditors have a first say basis in claiming the assets.

does not increase for preferred stock because with this type of stock, dividends are a fixed

Along with market performance, a firm may need to adapt its financial activities as well. These activities all relate to the way the firm is organized, in particular, its capital structure. Included in capital structure is the aspect of convertible bonds. These bonds can be converted to a specified amount of common stock. The downside of these convertible stocks and bonds is that they have the potential of diluting the Earnings Per Share (EPS)

The advantage to choosing a convertible bond for financing is that "they provide issuers with ‘cheap' debt and allow them to sell equity at a premium over current value". Jen, Choi, Lee (1997).

High risky bonds should provide higher return according with the risk related to the company. Also bonds are less risky than equity issued by the same company as in case of insolvency of an organization debt holders paid first and only after shareholders. Table 3 clearly illustrates that yield return increases according to risk, where government bonds are equalized to free risk issues (Davis, 2012). Corporate bonds yield coupon rate might fluctuate depending on rating of the company that reflects risk of the company. Investors also can gain or lose by selling bond in secondary market.

Corporations issue bonds as a method of financing company operations. As such, bonds may be issued as callable permitting the issuing organization to repay the

There are two basic ways of financing for a business: Debt financing and equity financing. Debt financing is defined as 'borrowing money that is to be repaid over a period of time, usually with interest" (Financing Basics, 1). The lender does not gain any ownership in the business that is borrowing. Equity financing is described as "an exchange of money for a share of business ownership" (Financing Basics, 1). This form of financing allows the business to obtain funds without having to repay a specific amount of money at any particular time. There are also a few different instruments that could be defined as either debt or equity. One such instrument is stock options that an employee can exercise after so many years with the

Though bonds provide such safety, their yields are very low and have little potential for capital appreciation in the long-run for both the issuer and receiver. Besides, the low interest-rate of bonds makes the return on holding cash virtually non-existent (Voya & Scotia, 2009). Convertible bonds, however, offer a middle ground between the safety of bonds and the upside potential, and risk, of stocks. For this firm seeking income, higher-yielding convertibles bonds are the right options they can explore. This allows for the downside protection of a

If external financing is required, the “safest” securities, namely debt, are issued first. Although investors fear mispricing of both debt and equity, the fear is much greater for equity. Corporate debt still relatively little risk compared to equity because, if financial distress is avoided, investors receive a fixed return.. Thus, the pecking order theory implies that, if outside financing required, debt should be issued before equity. Only when the firm’s debt capacity is reached should the firm consider equity.