for certain restrictions, on the company such as a limitation on dividends and minimum
working capital requirements.If a provision of the indenture is violated, the bonds are in default. Bonds are issued in
$100 0 denominations. The interest payment to the bondholder (usually semi annually)
is called nominal interest, which is the interest on the face of the bond.The various types of bonds that may be issue are debentures, subordinated debentures,
mortgage bonds, collateral trust bonds, convertible bonds, income bonds, guaranteed
bonds, and serial bonds.Financial advisory services (e.g. Standard and Poor’s, and Moody’s) rate publicly
traded bonds according to risk in terms of the receipt of principal and interest. Bond
rating is important to financial management because they influence marketability and
the cost associated with the bond issue.The proper mixture of long-term debt to equity in a company depends on the type of
organization, Credit availability, and after tax cost of financing. Where a high degree
of financial leverage exists, the firm may wish to take steps to minimize other corporate
risks.Debt financing is more appropriate when:
(1) Stability in revenue and earnings exists
(2) There is a satisfactory profit margin
(3) There is a good liquidity and cash flow position
(4) The debt/equity ratio is low
(5) Stock prices are currently depressed
(6) Control considerations are a primary factor
(7) Inflation is expected
(8) Bond indenture restrictions are not burdensome.
Bond may be refunded by the company prior to maturity through either the issuance of
a serial bond or exercising a call privilege on a straight bond. The issuance of serial