Multiple Choice
Under which market condition would a company typically sell bonds at a discount from par value?
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
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A corporate bond is a corporation's written pledge to repay a specified amount of money along with:
A
ownership rights in the corporation
B
dividends based on company profits
C
interest payments at specified intervals
D
voting rights at shareholder meetings
Verified step by step guidance1
Understand the concept of a corporate bond: A corporate bond is a debt instrument issued by a corporation to raise funds. It represents a promise to repay the principal amount (the face value of the bond) at maturity and to make periodic interest payments to the bondholder.
Clarify the nature of interest payments: Interest payments are typically made at regular intervals (e.g., annually, semi-annually, or quarterly) and are calculated based on the bond's stated interest rate, also known as the coupon rate.
Differentiate corporate bonds from equity instruments: Unlike stocks, corporate bonds do not provide ownership rights, voting rights, or dividends. Bondholders are creditors, not owners, of the corporation.
Review the options provided in the problem: Ownership rights, dividends, and voting rights are associated with equity (stocks), not debt (bonds). The correct feature of corporate bonds is the periodic interest payments.
Conclude the reasoning: Based on the explanation above, the correct answer is 'interest payments at specified intervals,' as this is the defining characteristic of corporate bonds.
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