ACC 281 Week 3 DQ2 - 7422

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Why do companies issue bonds? Would you rather buy a bond at a discount or a premium rate? Explain why. What is the determining factor of whether a bond is sold at a discount, face, or premium?

Companies issue bonds to raise funds as an alternative to issuing new shares of stock. The issuance of stock has a negative impact on earnings per share, and is unpopular with investors. Bonds, even though they require interest payments, are more desirable because they usually do not have as big an impact on EPS. Companies can also make their bonds callable if they choose.

It doesn't matter if a bond sells at a discount or a premium. What matters is the true interest rate, and that it is in line with that of other bonds in the same industry. Even if a bond sells at a discount, the real rate of interest must be calculated to determine whether or not it is a good deal. Because both the face value and the stated interest rate are fixed, the terms "discounted" and "premium" does not mean a good or bad deal. Companies sell bonds at a discount or premium to make them match the market price, since they cannot change the stated interest rate or face value after issuance.

 

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Why do companies issue bonds? Would you rather buy a bond at a discount or a premium rate? Explain why. What is the determining factor of whether a bond is sold at a discount, face, or premiu