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Bond Financing

1.What obligation does an entrepreneur (owner) have to investors that
purchase bonds to finance the business?
2.Describe a situation in which a company would chose to issue bonds.
3.What are the advantages of bond financing.
4.What challenges will this company face regarding bond financing.

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Hi,

Interesting questions! Let's take a closer look.

RESPONSE:

1.What obligation does an entrepreneur (owner) have to investors that purchase bonds to finance the business?

When a company issues bonds, it is borrowing money from investors in exchange for which it agrees to pay them interest at set intervals for a predetermined amount of time. In essence, it is the same thing as a mortgage only the investor is the bank (http://beginnersinvest.about.com/cs/bonds1/a/040401a.htm). The obvious obligation of the entrepreneur is making scheduled interest and principal payments. And then if you fall behind, it depends if the investor(s) have a mortgage on the business. If they do, they can claim the assets, otherwise they become a creditor in bankruptcy proceedings.

Private Activity Bond (also known as Tax Exempt Bonds) - Private Activity Bonds are bonds issued by or on behalf of the state or local governmental entities for the benefit of a private company. The purpose is to provide special financing benefits for qualified projects. These bonds are used to attract private investment for projects that have some public benefit. Interest on the bonds is generally exempt from federal income taxes for ...

Solution Summary

Through illustrative examples and discussion, this solution addresses several questions on various aspects on bond financing and purchasing e.g. obligations of an entrepreneur to the investors who purchase bonds to finance the business, a situation a company would chose to issues bonds, advantages of bond financing and the challenges of this company faces regarding bond financing.

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