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ISSUING BONDS. A bond is a written promise to pay a specific amount of money at a


certain date in the future or periodically over the course of a lo an, during


which time interest is paid at a fixed rate on specified dates. Should the


holder of the bond wish to get back money before the note is due, the bond may


be sold to someone else. When the bond reaches “maturity”, the company promises


to pay back the principal at its face value. 


Bonds are desirable for the company because the interest rate is lower than in most


other types of – borrowing. Also, interest paid on bonds is a tax deductible


business expense for the corporation. The disadvantage is tha t interest


payments ordinarily are made on bonds even when no profits are earned. For this


reason, a smaller corporation can seldom raise much capital by issuing bonds.



SALES OF COMMON STOCK. Holders of bonds have lent money to the company,

but they have no voice in its affairs, nor do they share in profits or

losses. Quite the


reverse is true for what are known as “equity” investors who buy common stock.


They own shares in the corporation and have certain legal rights including, in


most cases, the right to vote for the board of directors who actually manage


the company.


But they receive no dividends until interest payments are made on outstanding


bonds.
If a company’s financial health is good and its assets sufficient, it can create


capital by voting to iss ue additional shares of common stock. For a large


company, an investment banker agrees to guarantee the purchase of a new stock


issue at a set price. If the market refuses to buy the issue at a minimum


price, the banker will take them and absorb the loss. Like printing paper


money, issuing too much stock diminishes the basic value of each share.

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