Week 2 Post 3 Review: Minimum Of 150 Words In APA Format

Week 2 Post 3 Review Minimum Of 150 Words Apa Formatstephenbefore Vide

Companies utilize bonds as a critical financial instrument to raise capital for various purposes, including funding daily operations and supporting long-term projects. When a corporation issues bonds, it essentially borrows money from investors, creating a legal obligation to pay back the principal amount plus interest at a predetermined future date. This method of financing is advantageous because it allows companies to access large sums of capital without diluting ownership, as would occur with issuing stocks. Furthermore, bonds can offer attractive credit ratings from agencies such as Moody’s and Standard & Poor’s if the issuer demonstrates the ability to meet interest and principal payments on time, which can attract more investors in future financing rounds (Ross, Jordan, & Westerfield, 2016).

In contrast, financing with stocks involves selling ownership shares in the company to investors. Stockholders benefit from dividends that depend on the company's performance but do not have the legal obligation to repay their investment like bondholders. One key difference is that bond interest payments are tax-deductible, whereas dividends are paid from after-tax profits. Additionally, bonds typically have a fixed maturity date, providing a clear timeline for repayment, whereas stocks do not have a maturity date and represent permanent ownership stakes (Flowers, 2016). The choice between bonds and stocks depends on the company's current needs, financial strategy, and market conditions.

Bond valuation primarily relies on two factors: the prevailing interest rates and the creditworthiness of the issuing company. When interest rates increase, the value of existing bonds generally decreases because newer bonds offer higher returns. Conversely, if interest rates decline, existing bonds with higher fixed interest payments become more attractive, raising their value (Summary of Bond Market, n.d.). Creditworthiness influences the bond's risk level; companies with high credit ratings are perceived as less risky, enabling them to issue bonds at lower interest rates, which benefits both the issuer and investors. A low credit rating signals higher risk, which generally leads to higher interest rates demanded by investors to compensate for potential default (Ross et al., 2016).

There are fundamental differences between stocks and bonds in terms of ownership, risk, and return. When a company issues stock, it sells a portion of ownership to investors, who then share in the company's profits and losses. Stocks tend to be more volatile but offer unlimited growth potential through capital appreciation and dividends. Bonds, on the other hand, are debt instruments that obligate the company to make fixed interest payments and repay the principal at maturity. Bonds usually provide more stability and predictable income streams but have limited upside potential compared to stocks. The decision to use either instrument depends on the company's financial strategy, risk appetite, and market conditions (Ross et al., 2016).

References

• Flowers, B. (2016). Financing Businesses and Public Projects with Stocks and Bonds.
• Ross, S. A., Jordan, B. D., & Westerfield, R. (2016). Fundamentals of corporate finance. New York, NY: McGraw-Hill/Irwin.
• Summary of Bond Market (n.d.). Fundamentals of corporate finance. New York, NY: McGraw-Hill/Irwin.