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ACC 291 Week 2 DQ 2

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ACC 291 Week 2 DQ 2
Why do companies issue bonds? What is the determining factor of whether a bond is sold
at a discount, face, or premium? Would you rather buy a bond at a discount or a premium
rate? Why?
Companies issue bonds as an alternative to issuing stock to increase long-term capital. According
to Weygandt, Kimmel, and Kieso (2010) issuing bonds has three advantages over issuing stock.
The first advantage is that it does not affect stockholder control. The second advantage is “Bond
interest is deductible for tax purposes; dividends on stock are not (deductible)” (Weygandt,
Kimmel, & Kieso, 2012, pg. 1). The third advantage is the potential zero affect to earnings per
share, whereas issuing bonds does not dilute outstanding shares of common stock. The
determining factor of whether bonds sell at discount, face, or premium is the relationship
between the contractual interest rate and the market interest rate. When both rates are the same
then the bonds sell at face or par. When the market rate is higher than the contractual rate then
bonds sell at discount. When the market rate is lower than the contractual rate then bonds sell at a
premium. Under normal circumstance, I would rather buy bonds at a discount to take advantage
of the less than par cost. However, bond traders often buy premium bonds to hedge against
inflation or increasing interest rates, and premium bonds can outperform par or discount bonds.

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Reference:
Weygandt, J.J., Kimmel, P.D., & Kieso, D.E. (2010). Financial accounting (7th ed.). Hoboken,
NJ: John Wiley & Sons.

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