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    Long Term Financing Stockc Vs Bonds

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    Arijana Tirak
    This paper compares stocks and bonds as options for long-term financing for a young entrepreneur's successful business. Stocks represent ownership in a company and provide returns through dividends or stock price appreciation, while bonds are a form of debt where the issuer promises to repay the principal plus interest to the bondholder. For a new company, issuing bonds may be preferable to stocks since it does not require giving up ownership, but there is a risk the bonds could be rated as junk. Therefore, the paper concludes the entrepreneur should consider issuing bonds instead of stocks to finance the new profitable idea.

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    Long Term Financing Stockc Vs Bonds

    Uploaded by

    Arijana Tirak
    37 views5 pages
    This paper compares stocks and bonds as options for long-term financing for a young entrepreneur's successful business. Stocks represent ownership in a company and provide returns through dividends or stock price appreciation, while bonds are a form of debt where the issuer promises to repay the principal plus interest to the bondholder. For a new company, issuing bonds may be preferable to stocks since it does not require giving up ownership, but there is a risk the bonds could be rated as junk. Therefore, the paper concludes the entrepreneur should consider issuing bonds instead of stocks to finance the new profitable idea.

    Original Description:

    Analyzes the oportunities of a new company wether it should issue stock or bonds

    Original Title

    Long Term Financing Stockc vs Bonds

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    This paper compares stocks and bonds as options for long-term financing for a young entrepreneur's successful business. Stocks represent ownership in a company and provide returns through dividends or stock price appreciation, while bonds are a form of debt where the issuer promises to repay the principal plus interest to the bondholder. For a new company, issuing bonds may be preferable to stocks since it does not require giving up ownership, but there is a risk the bonds could be rated as junk. Therefore, the paper concludes the entrepreneur should consider issuing bonds instead of stocks to finance the new profitable idea.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    37 views5 pages

    Long Term Financing Stockc Vs Bonds

    Uploaded by

    Arijana Tirak
    This paper compares stocks and bonds as options for long-term financing for a young entrepreneur's successful business. Stocks represent ownership in a company and provide returns through dividends or stock price appreciation, while bonds are a form of debt where the issuer promises to repay the principal plus interest to the bondholder. For a new company, issuing bonds may be preferable to stocks since it does not require giving up ownership, but there is a risk the bonds could be rated as junk. Therefore, the paper concludes the entrepreneur should consider issuing bonds instead of stocks to finance the new profitable idea.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 5

    UNIVERSITY OF SARAJEVO

    SCHOOL OF ECONOMICS AND BUSINESS

    LONG-TERM FINANCING:

    STOCKS VS. BONDS

    ESSEY PAPER

    Subject: Financiar markets and instruments


    Profesor: Džafer Alibegović PhD.
    Student:Arijana Tirak 72685
    Studies: FM/MM
    Concentration:Financial management

    SARAJEVO, DECEMBER 2018


    Introducion

    Imagine you are an entrepreneur with a successful young business and you just got a

    brilliant idea that could be very profitable. Like any other idea it needs certain funds in

    order to be realised and you decide that that idea will pay off in five years period. Let's

    say you turn to several different banks and some of them turn you down while others give

    you a unacceptably high interest rate. You are left with only a few options. Lets say for the

    sake of this essey that you can not decide between issuing stocks or issuing bonds. Which

    one should you choose? This essey focuses on the issuer's point of view, more specifically

    their need for long term financing ( i.e. more than one year).

    Both of them are securities. Securities are a claim on the issuer. Those who lack funds

    issue securities in order to generate sufficient funds. Those who have excess funds buy

    securites in order to earn returns i.e. to incease their welth. In order answer this queastion

    first a brief theoretical backround for both stocks and bonds will be presented after which

    a conclusion will be made.

    Stocks

    Stocks are olso known as equity securities. When an individual buys a share they get a

    certain percentage of the ownership ower the company (depends on the number of issued

    shares). The value of a company is the total value of all outstanding stock of the company.

    An individual may buy a stock in order to earn a return from a stock. They can earn that

    return in two ways. If the value of the stock incerases they can eidher sell it or receive

    divident payment. Price of the stock is determined on the stock exhange. The more

    demand or a stock of a certain company the higher is the price fo that stock.
    Stock holders have certain rights, depending on the type of share they own. Common

    stockholders have a right to vode and receive dividents. Prefered stock holders do not

    have the right to vote, but their dividents have fixed values i.e. they receive the same

    payment each month regardles of the movements in the stock market. Another right that

    the prefered stock has is the priority over the claims of common shareholders. Also one

    significant fact about stocks is that thay do not have a maturity date.

    Bonds

    Bonds are debt backed securities. A company promises to pay back to the investor the

    specified amount at the specific date and often with periodic interest payment. This means

    that unlike stocks, bonds have a maturity date. The cupon rate is the rate of interest that

    the issuer must pay, and this periodic interest payment is called the cupon payment. This

    rate is usually fixed and it is not dependent on the market interest rates. This rate is

    determined by the creditworthiness of the company. The more risky the company of the

    project is the higher the rate they have to pay. There are different agencies which rate the

    riskiness of the bonds, such as Moody's or Poor's. If a rating agency estimates that the the

    bond is to risky i.e. it is considered a junk bond, many potential investors will not be

    willing to take the risk, but a few of them are ready to take on the risk if they are

    compensated accordingly.

    There are may types of bonds but in this essey I will focus on corporate bonds, since we

    are talking about the view point of an entrepreneur. Corporate bonds are issued by

    companes who need to borrow funs for one reason or another. Most corporate rates have

    a face value of $1,000 and pay interest semiannually. Many companies offer a colateral if

    they fail to make payments. Bond holders also have a residual claim on the company,

    meaning in a case of the faliar of the copany they get paid from the residal asstes.
    Unlike stockholders, bondholders do not have any ownership in the company. That can

    cause a problem for the bondholder because a manager might put the needs of the

    shareholders infront of the needs of bondholders. That is a reason why issuers of the bond

    might be under restrictive covenants. Those are restrictions on the managers of the

    issuing company such as issuing aditional debt or prohibition of mergers...

    Conclusion

    Now that the difference between stocks and bonds is clear, a certain conclusion can be

    made. Since we are evaluating thease two securities from a view point of a company we

    can analyse what these mean to the aforementioned entrepreneur.

    If he choses to make his company public and issue shares he will have to give up part of

    the ownership of the company and will have to listen to the bord of the directors etc. This

    might not be the best option for a young company since it's net worh might not be that big

    and it is still developing its managerial structure.

    If he chooses to issue bonds he might be at a risk of those bonds being rated as junk. On

    the other hand if he successfully sells all of the bonds be issued, after five years he is done

    with the payments and he still owns the company.

    In my honest opinion, this entrepreneur should issue bons insted of stocks. Altoug it is a

    smart idea do diversify i.e. to issue both stocks and bonds, but since we are talking about

    a new company it would be difficult them to issue and maintain both of them. Maybe in a

    five years period the company will grow and the entrepreneur might have more options

    to gather funds.

    Reference

    1.Williams, R.T. (2011). An Introduction to Trading in the Financial Markets


    2. Diffen, 2018, Stocks vs. Bonds

    Available at: https://www.diffen.com/difference/Bond_vs_Stock

    3. Investopedia, James Chen, 2018, Stock

    Available at: https://www.investopedia.com/terms/s/stock.asp

    4. Investopedia, James Chen, 2018, Bonds

    Available at: https://www.investopedia.com/terms/b/bond.asp

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