Whereas the buyer of a corporate bond is lending

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Unformatted text preview: e bond. Instead of selling bonds, AT&T could issue stock to raise money. Remember that a share of stock is a claim on the assets of the corporation that gives the purchaser a share of the ownership of the corporation. Whereas the buyer of a corporate bond is lending funds to the corporation, the buyer of a share of stock is acquiring an ownership right in the corporation. So, if you buy a bond from a corporation, you are a lender, not an owner. If you buy shares of stock in a corporation, you are an owner, not a lender. The key difference between bondholders and stockholders is that the corporation is under no legal obligation to pay stockholders. Bond purchasers have lent money to the corporation, so the corporation must repay these loans, along with extra payments (such as the $800 Quentin received each year), to the bond purchasers for the use of their money. Stockholders do not lend funds to the corporation; instead, they buy a part of it. If the corporation does well, the value of its stock will rise, and they will be able to sell it at a price higher than the price they paid for it. However, if the corporation does not do well, the value of their stock will fall, and they will most likely have to sell it for less than the purchase price. 07 (154-185) EMC Chap 07 11/17/05 5:14 PM Page 167 The board of directors are elected to their positions by a vote of the stockholders. What do you think are the major responsibilities of the board of directors? The Franchise QUESTION: I’d like to go back to the example of Quentin buying the bond. He buys the bond in 2006 and the bond matures in 2016—10 years later. Suppose Quentin wants to get the money out of the bond before the 10 years have passed. Can he do this? ANSWER: Yes, he can sell the bond (to anyone willing to buy it) at any time after he purchased it. He does not have to wait for the full 10 years before cashing in the bond. Nothing guarantees, though, that Quentin will sell his bond for the price he paid for it or for more. He might have to sell the bond for less than the purchase price. Why? Because new bonds might have a higher coupon rate than the coupon rate on the (old) bond that Quentin purchased. So he will have to sell his bond for less to compete with the new bonds that are offering a higher coupon rate. The franchise is a form of business organization that has become more common in the last 25 years. A franchise is a contract by which a firm (usually a corporation) lets a person or group use its name and sell its goods or services. In return, the person or group must make certain payments and meet certain requirements. For example, McDonald’s Corporation offers franchises. Individuals can buy the right to use McDonald’s name and to sell its products, as long as they meet certain requirements. The corporation, or parent company, is called the franchiser; it is the entity that offers the franchise. The person or group that buys the franchise is called the franchisee. A few well-known franchises are McDonald’s, Burger King, Wendy’s, Pizza Hut, Domino’s Pizza, and Taco Bell. How It Works The franchise agre...
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This document was uploaded on 01/16/2014.

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