Time value of Money orporations can affect the default risk

Time value of Money orporations can affect the default risk of their bonds by changing the type of bonds they issue. Under a mortgage bond, the corporation pledges certain assets as security for the bond. A debenture is an unsecured bond, and as such, it provides no lien against specific property as security for the obligation. Debenture holders are, therefore,general creditors whose claims are protected by property not otherwise pledged Subordinated debentures have claims on assets, in the event of bankruptcy, only after senior debt as named in the subordinated debt\'s indenture has been paid off.Subordinated debentures may be subordinated to designated notes payable or to all other debt Some companies may be in a position to benefit from the sale of either development bonds or pollution control bonds. State and local governments may set up both industrial development agencies and pollution control agencies. The agencies are allowed, under certain circumstances, to sell tax-exempt bonds, then to make the proceeds available to corporations for specific uses deemed by Congress to be in the public interest Let\'s continue discussion on this topic Instructions: Discussion prompt, resource or idea/example

Solution

A Company can issue different types of bonds such as a mortgage bonds, Debenture and subordinated debenture. The difference between these types of debt is that mortgage bonds and subordinated debentures create a claim on the company\'s assets. Debentures on the other hand are unsecured and create no claim on the Assets of the company. Hence from the point of view of the company debentures are preferable since debenture holders are general creditors. However the company has to pay extra return to attract the investors towards such bonds due to higher risk involved. This increases the cost of capital of the company and so the business has to raise finance from the correct sources depending upon the burden of interest that it can take on.