The Market for Borrowing Corporate Bonds Essay Example | Topics and Well Written Essays - 2000 words

The Market for Borrowing Corporate Bonds - Essay ExampleAn cost-efficient corporate bond securities industryplace depart lead to the efficient allocation of investment funds. An efficient market place will as well as lead to investments in riskier assets. The types of securities which gutter be issued in the corporate bond market be debentures, unsecured notes and subordinated debt. One of the major reasons for developing a corporate bond markets is that the bond market provide an alternative solution or source for operational funds for the private sector other than borrowing from the equity markets and banks. This helps in improving the financial stability and allocation of credit.Companies running successfully mickle decide to expand their activities and commence new projects. To raise capital the bon ton pile decide on heave the funds from the corporate bond market as it can be beneficial for the follow in the long run.The following sections give a detail understandi ng of corporate bonds. These sections describe the types of securities that can be issued in the corporate bond market, the types of companies that can issue it, the benefits of issuing bonds over other sources of finance, the providers of debt and their requirements. This discipline will certainly help the Board of Directors to reach a decision regarding the use of corporate bonds for raising capital to finance the new project. Types of securities that can be issued in the corporate bond market A play along can issue three types of securities in the corporate bond market. These three types are explained below. 1. Debentures A debenture is secured by a fixed or floating dismantle over the issuing communitys unpledged assets. There are two types of debentures fixed charge and floating charge. Both the types are explained below. a. Fixed Charge debenture A fixed charge is placed over the permanent assets of the company such as fixed assets. These assets cannot be sold until the bo ndholder has been repaid in the event of default. These bondholders do the first arrogate on the assets of the company. b. Floating charge debenture A floating charge is issued over those assets which the company will sell in the normal course of the business to generate income such as finished good. These assets can be sold so the company issues a floating charge over these assets. Once the company defaults the floating charge becomes fixed charge. The bondholders will then(prenominal) take possession of the assets. Once the claims of the fixed charge bondholders have been satisfied, these bondholders can claim on the remaining assets. For example, if all the fixed assets have been employ to cover off the fixed charge debenture holders, then the assets that the company sells to generate income will be used to pay off the floating charge debenture holders. 2. Unsecured Notes It is a corporate bond with no form of underlying security attached. These bondholders have no claim ove r the assets until the claims of the fixed-and floating charge bondholders have been satisfied. For example if a company defaults, the fixed charge debenture holders will be paid first, then the floating charge will be paid and finally the unsecured notes holders will be paid. 3. Subordinated Debt Subordinated debt is a long-term debt issue that ranks behind all other creditors. The subordinated debt also pays a specific interest stream. In the event of a default, the holders of subordinated debt receive nothing until the claims of all other creditors are satisfied. The debt issue may also include an agreement which states that the debt will not be presented for