More About Bond Features

More About Bond Features - Chapter 7.2: More About Bond...

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Chapter 7.2: More About Bond Features Securities can be classified as either debt or equity securities o Debt represents something that must be repaid Creditor (lender) – the person or firm making the loan Debtor (borrower) – the corporation borrowing the money Debt is not an ownership interest in a firm The corporations payment of interest on debt is considered a cost of doing business and is tax deductible Unpaid debt is a liability of the firm o So one of the costs of issuing debt is the possibility of financial failure The distinction between debt and equity is important for tax reasons Equity represents an ownership interest and is a residual claim o So equity holders and paid off after debt holders Maximum reward for debt is fixed by the amount of the loan, but maximum for equity is not Unfunded Debt – short term debt Debt securities are typically called notes, debentures, or bonds o Only difference between a note and a bond is the original maturity
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More About Bond Features - Chapter 7.2: More About Bond...

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