Understanding Bonds and an Overview of Bond Basics

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Understanding bonds is very important when a corporation is in need of raising additional funds. For better understanding of bonds, a bond is debt instrument issued by a borrowing company to an investor, which contains an unconditional promise to pay specific money at a future date. Further, the company has to pay periodic interest payments based on stated rate until the principal amount is fully paid.

A company who intends to invest in bonds must have full understanding of bonds and its mechanics, since there is a lot of factors involved regarding its issuance. The issuing company's decision to release investment bonds should be based on the following:

1. The amount of money the company intends to borrow;
2. The offered interest rate;
3. The conversion privilege, should there be any;
4. The maturity date whether callable, fixed or serial bond; and,
5. The property to be pledged, if required.

In like manner, understanding bonds require that the company should properly address the different questions listed hereunder:

1. How much of the debt can be safely handled by the company in case of unfavorable economic conditions? An understanding of bonds will give us information on how the issuing company will be required by law to set up a Sinking Fund for the bonds. The funds here will be used to redeem the debt instruments.

2. What is the break-even sale due to the increase of expenses brought about by the issuance of bonds? This targeted amount of sale that a company should strive hard to attain once the expansion or business venture has been launched into full operation. The income derived should already take into account the additional expenses incurred for its expansion.

3. If the funds will be invested in a certain plant facility, will the cash inflow support the required interest payments? The ideal projection is to generate income that will create a self-liquidating effect. The income realized will be used to pay off monthly interests due to bondholders as well as provide a certain sum to be set aside in the Sinking Fund.

If the board of directors has full understanding of bonds to issue, a proposal will now be presented to stockholders for approval. The stockholders must have full understanding of bonds issuance to warrant their approval. Once the approval is secured, a deed of trust will be made authorizing the issuance of bonds.

The sale of bonds may be done by the issuing company or sold through an underwriter who will be in charge in the reselling of bonds to different investors who in turn should also have an in-depth understanding of bonds.