Bonds Vs Equity
Issuing of bonds will allow Amazon to access capital faster. Unlike issuing equity, bond do not dilute the value of the existing shares. Bonds are often regarded as better and safer investment that stock or equity. Unlike other investments, bonds are less likely to suffer day to day volatility. Besides, the interest payment associated with bonds are sometime more than the general amount of dividends. Bonds are liquid, meaning that they can be simply and quickly converted to cash while maintaining their market value. Therefore, raising funds through bonds would be beneficial to Amazon. With bonds Amazon would bear relative less cost on issuing bonds than issuing equity. An organization is often required to conduct various procedures and adhere to certain measures that are in line with the stock exchange market which are complex and expensive (Bolton & Freixas, 2000). Raising of funds via bonds do not require complex formalities and procedures, making it less expensive. Furthermore, with bonds, there is no split of ownership by issuing them. Conversely, in the case of equity issue, shareholders are regarded as the owners of the organization can control the affairs of the company including matters regarding splits.
Bonds Vs Bank loan
The benefits that Amazon will experience by raising funds by issuing bonds rather than taking a bank loan include:
Question (i) and (ii)
The price of the bond at the time of issue is calculated after taking into account the coupon payment the yield to maturity, the coupon rate and the specified period after which coupon payments are made. For the case Amazon (i) the price of the bond is calculated as follows:
The par value =$1,000
Period= 10 years *2 =20
Coupon rate = 3.15%/2 (semi-annual) =1.575%
Coupon payment =0.01575%*1000
Price of the bond = Coupon payments/ (1+Yield) ^1…….. Coupon payments (1+Yield)^n +Par value/ (1+Yield) ^n
(i)When Yield (rate) is 3.5% the price of the bond is calculated as follows
P= A (1- 1/ ((1+r)^n))/r +Z/(1+r)^n
Where A is the coupon payment
(r) is the Yied (rate)
(n) is the period
( Z) represents the par value
P = 15.75(`1-1/(1.035)^20)/0.035 +1000/ 1.035^20
|Details||Case( i)||Case (ii)|
|Par value||$ 1,000.00||$ 1,000.00|
|Semiannual coupon rate||1.575 (%)||1.575 (%)|
|Yield to maturity||3.5(%)||3.0(%)|
|Yield to maturity semi-annual||20||20|
|Semiannual coupon payments||$ 15.75||$ 15.75|
|The price/value of the bond||$ 726.41||$ 788.00|
Value of the bond at maturity = P* (1+r)^n
where (p) is the principal
( r )is the interest rate
( n) is the period
Value at maturity = P* ((1+r)^n-1)/r
= 15.75* ((1.035)^20 -1)/0.035
= 445.5+ 1000
= 15.75* ((1.03)^20 -1)/0.03
= 423.21+ 1000
As an investor, I would prefer a bond paying 5% p.a being paid semi-annually since semi-annual bonds receive interest payment after every six month (shorter period) rather than one year (a longer period. It is worth noting that regardless of whether the bond is compounded or discounted annually or semi-annually, the bond often yield the same amount of interest. But then, I will give more attention to the bond that has higher yield than the initial cost or selling price. If the existing rates are lower than the interest rate of the bond, then the annual bond will have a higher price that a semiannual bond since as an investor, I will be willing to pay more for another six mothers of comparatively higher accrued interest. But is the existing interest rates are higher that the interest rate of the bond, the as investor, I would prefer a semiannual version of the bond because they will start earning compounding interest at relatively higher market rate.
Bolton, P., & Freixas, X. (2000). Equity, bonds, and bank debt: Capital structure and financial market equilibrium under asymmetric information. Journal of Political Economy, 108(2), 324-351.
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