Download Bonds Payable * A corporate debt

One way to raise funds for the firm
Characteristics of
corporate term bonds
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$1,000 principal, completely repaid at
maturity
Long-term up to 30 years
Stated interest rate payable annually or
semi-annually
Changing interest rates can impact the
cash proceeds
If market rate > stated rate, issue at a
discount
If market rate < stated rate, issue at a
premium
Advantages
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Interest is tax deductible
Investors can sell bonds before they
mature by trading in the market
May be a lower interest rate than a bank
loan
The corporation can retire debt or refinance
by buying back their own bonds in the
market
Callable bonds, even easier to retire or
refinance
Disadvantages
May have restrictive covenants that limit
the company’s activities
 As the company borrows more money,
the interest rates may be higher
 Unsecured debt – interest rate of bond
then depends on the financial standing
of the corporation
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