Economics and Finance Essay Example | Topics and Well Written Essays - 2000 words

Economics and Finance - Essay Example Another important feature of a developed bond market is that this corporate bond market provides an alternative source for funds used for operational purposes by the private sector other than borrowing from banks or from the equity markets. Debentures, Unsecured Notes and subordinated debts are those securities which are traded and issued on the corporate bond market. Those firms which are running efficiently and successfully can also decide to spread out their activities and start-up new projects. To start new projects the firms need to raise capital. Hence the firm can decide on raising those funds from the bond market as it can be advantageous for the firm in the long run. Understanding the corporate bond market is critical for any company. The following sections give an outlook of the market, on how it functions(the securities which can be issued in the market), the advantages of issuing bonds over other sources such as equity markets and other sources of finance, the types of fi rms that can issue the corporate bonds, the providers of debt and their requirements. The information of the corporate bond markets will help the Board in making informed decision regarding the use of corporate bonds for raising capital to finance the new project which is worth 800 million. Types of securities that can be issued in the corporate bond market The following are the three types of securities that a firm can issue. 1. Debentures A debenture is a type of a document which is not secured by any collateral. Below are the two types of debentures explained? a. Fixed-Charge debenture:. In this type of debenture, a charge is fixed over those assets which are permanent for example fixed assets like buildings. In case the company defaults, these assets are not allowed to be sold until the bondholder has been satisfied in the event of default. The first claim on the assets is of these bondholders b. Floating-charge debenture: In this type of debenture, the charge is floating, that is a charge is issued over assets such as finished goods. Since, these assets are meant to be sold the firm issues a floating charge over these assets. When the firm defaults the floating charge is converted into fixed charge. The bondholders can then take control of the assets. When the claims of the fixed charge bondholders are satisfied, they can claim the remaining assets of the firm. 2. Unsecured Notes It is a corporate bond with no underlying security attached to it. The bondholders cannot claim the assets until the fixed-charge and floating-charge bondholders are satisfied. In the event of default, the unsecured notes holders will be paid last. 3. Subordinated Debt Subordinated debt is that type of a debt which is issued for the long-term and in the event of a default, subordinated debt holders receive after all other creditors. Subordinated debt is closer to equity than debt. It is shown as shareholders’ funds on the balance sheet. It improves the credit rating of the firm. As a result the firm can borrow more easily. Types of firms that qualify for raising direct debt Direct debt can be raised by public limited companies, who can do this by issuing financial securities such as stock and bonds.. These shares can be issued to the general public by means of an Initial Public Offering (IPO) and