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Raising capital

Companies in need of raising capital can do so in two ways: one, they can sell equity to raise cash, or two, they can borrow the funds. If the company chooses to sell equity, it faces possible ownership dilution and a loss of control for its current owners. For this reason, it may be more advantageous for the company to seek borrowed funds. Two common sources of borrowed funds are loans and bonds. Loans are generally administered by banks or similar financial institutions; bonds are issued directly by the company to the bondholders. Because bonds are an important investment option held by pension funds, insurance companies and other institutional investors, the market has established rating systems for evaluating the attractiveness of bonds issued by various companies. Bonds which fall in the lower echelons of this rating system are called "junk" bonds. Such bonds offer high return for high risk. This research examines recent developments in the junk bond market, and the events which led to the current junk bond market situation.

Bondholders are creditors of the issuing corporation, and as such, have a prior claim on earnings and assets, ranking ahead of preferred and common stockholders. Interest must first be paid on bonds before dividends can be issued to stockholders, and in case of dissolution or bankruptcy, bondholders have a prior claim on assets over stockholders.

There are several types of bonds which can be issued: debentures, first mortgage bonds, equipment trust certificates and income bonds. Debentures are the most common type of bond; investors who purchase debentures are general creditors of the corporation and are protected by the overall assets of the enterprise rather than by specific assets. First mortgage bonds use corporate property as collateral. Equipment trust certificates are used by airlines, railroads and shipping companies (corporations with large amounts in capital equipment) and give ...

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Raising capital. (1969, December 31). In LotsofEssays.com. Retrieved 09:20, March 29, 2024, from https://www.lotsofessays.com/viewpaper/1686973.html