Types and Sources of Corporate Debt and Bond Covenants

In: Business and Management

Submitted By alondra22
Words 1145
Pages 5
Corporate debts may be short term or long term in nature. Short - term debts are incurred by the company in relation to its supplies of raw materials categorized as accounts payables and are normally paid within the accounting cycle or within one year. In the balance sheet, they fall under the current liabilities. These are supposed to be financed through the company’s current assets.
Long term debts are those acquired by the company from banks and through issuance of bonds. For loans from banks, the requirements of the lenders are normally: evidences of the company’s sound financial standing as reflected in its financial statements, effective management, nature of products (quality), and good track record of credit relationship with other fund providers. At times, they must be backed by collaterals.
Another option by which a company acquires addition funds is to issue bonds. This is a long term obligation of the company (issuer) to the bondholder to pay fixed interest rates periodically until the maturity date when the company must have to return the par value to the bondholder and terminates or redeem the bond. Hence, the financial obligation of the issuer or the company who opted to issue bonds for additional funds are: periodic fixed interest payments until the maturity date and the payment of the par value of the bond on the maturity date. The income of the bondholder is the periodic interest received (for coupon bonds) or the difference between the face value and discount value (for discount bonds).
Bond covenant is the agreement between the bond issuer (company) and bondholder reflecting the promise of the issuer to pay periodic interest payment (at agreed interest rate) until the maturity date and to redeem the bond at par value on the maturity date. PROS AND CONS OF DEBT FINANCING

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