MGMT 1 Lecture Notes - Lecture 1: Merage Family, Sinking Fund, Debenture
Document Summary
Bondholders are creditors of the firm, not owners. They seldom vote on corporate matters; thus management maintains control over the firm"s operations. Bond interest is a business expense and tax-deductible to the firm. Bonds are a temporary source of funding eventually repaid and the debt obligation is eliminated. Can be repaid before the maturity date if they contain a call provision, and can be converted to common stock. Bonds increase debt (long-term) liabilities and may adversely affect the market perception of the firm. Paying interest on bonds is a legal obligation if interest is not paid, bondholders can take legal action to force payment. The face value of the bond must be repaid on the maturity date. Without careful planning, this obligation can cause cash flow problems when the repayment comes due. Corporations can issue two different classes of corporate bonds: Unsecured bonds/debenture bonds bonds that are not backed by any specific collateral (such as land or equipment).
