Accounting and Finance Homework: Bond Valuation, Equity, and Shares

This assignment provides detailed answers to questions related to accounting and finance, focusing on bond valuation, different types of bonds (high yield and investment-grade), and the amortization of bond premiums. It also explores the differences between secured and unsecured bonds, highlighting the risks and securities associated with each. Furthermore, the assignment delves into equity and preference shares, outlining their advantages and disadvantages, and explaining the various types of preference shares such as cumulative, non-cumulative, convertible, and non-convertible shares. The solutions offer a comprehensive understanding of these financial instruments and their implications for investors and companies.

Running head: QUESTIONS 0
ACCOUNTING AND FINANCE
MAY 12, 2019
STUDENT DETAILS:

QUESTIONS 1
Contents
Answer 1....................................................................................................................................2
Answer 2:...................................................................................................................................3
Difference between secured bonds and unsecured bonds-.....................................................3
Answer 3:...................................................................................................................................4
1. Equity shares...................................................................................................................4
Advantages of equity shares...............................................................................................4
Disadvantages of Equity Shares.........................................................................................4
2. Preference shares.............................................................................................................5
Types of preference shares-................................................................................................5
Advantages of Preference Shares.......................................................................................5
Drawbacks of Preference Shares........................................................................................6
References..................................................................................................................................7

QUESTIONS 2
Answer 1:
1. There are various types of bonds. Two of them are explained below-
High yield bonds- The high yield bonds are the bonds, issued by financing vehicles or
organizations with comparatively pathetic balance sheets. These bonds have the rating under
BBB. Defaults are the different possibilities. As an outcome, high-yield bond prices are tied
very closely to the company balance sheet’s health. These bonds trace price of stock very
closely in comparison of the price of investment-grade bond. "High-yield does not render
similar asset-allocation benefits a person gets by combining the stocks and high-grade bonds.
Investment-grade corporate bonds- Investment-grade corporate bonds are issued through
financing vehicles and organisations with comparatively strong balance sheet. These bonds
have ratings of at minimum BBB from Standard and Poor's, Moody's Investor Services or
mutually (a degree is AAAA as highest, adopted by AA, A, then BBB, and so on). For
investment-grade bond, the risks of defaults are considered very attractive. Still, their yield is
higher than either agency bond or Treasury, though like most agencies they are completely
taxable. At the time of financial downturn, the bond tends to underperform agencies as well
as treasuries.
2. Bond premiums and discounts adjust a yield of bond to present rate in market. It is done to
achieve the competitive frame in a bond market. A procedure of amortization using the
interest expenditure account above bond’s life dissolves discount or premium. The business
offers the bond discount while a stated rate of bond is not more than the rate in market. The
discount draws the attention of the purchasers who will otherwise pass over a bond because
of the lower return.

QUESTIONS 3
The bond is measured to trade at the discount when its coupon rate. Government
organisations as well as non-government organisation issue the bond to raise cash to finance
the functions. While the people purchase the bonds, the bond’s issuers promise to pay
periodically to the holder of bond is lower than current interest rate. On the other hand, the
business offers the bond premium while stated rate of bond is more than rate in market. The
premium also draws the attention of the purchasers as all desire to create the most from the
investment.
3. The best method to amortize the bond premium is effective interest method or effective
interest rate method. The effective interest method is a method, which is used by the
purchaser of bond to the account for accumulation of the bond discount as a balance is
stimulated in the income as interest or to repay the bond premium in the interest expenditures.
The effective interest rate makes use of the book value, or bond’s carrying amount, for
determining interest income, and the differences between interest income and interest
payment of bond is a amount of the accumulation or paying off posted every year.
Besides, as per the effective interest rate method the amount of interest expenditure within
the provided years would compare with an amount of book value of bond. It represents that
while the book value of bond reduces, the amount of interest expenditure would reduce. In
brief, an effective interest rate method is very practical in comparison of straight-line method
to amortizing bond premium.

QUESTIONS 4
Answer 2:
Difference between secured bonds and unsecured bonds-
There are various options for the people, in a case when they have been arrested as well as
require making the payment of the bond. When there are different kinds of bonds, the secured
bond and unsecured bond are considered as main significant bonds. This is significant to
know the differences between these bonds to select the best one. With best understanding of
differences, people will be able to know that which is the best option for them to use is.
The secured bond refers to the bond, which is secured by pledging of the particular asset by
issuer, which is the method of security on a loan. The secured bond may also be secured with
the revenue stream, which comes from projects that the bond issues were utilised to finance.
In the addition, there are certain types of secured bonds, which are equipment trust
certificates and mortgage bond. Assets like properties, equipment, or other income stream
collateralize the secured bonds. For an instance, mortgage-backed securities are backed
through a title to the house of borrower and through income stream from mortgage payment.
In a case when the issuers do not create timely notice and principal payment, investor has
right to the fundamental assets as the payment.
Further, the unsecured bonds are different because they are not backed by something
tangible. In a case when the judge provides theoffender release on quotation or release on
individual recognizance, it means that the it is believed by magistrate that the offender would
return to the courts without the enticement of placing the collateral, whether that be in
method of money, real estates, revenues or equipment. The offenderjust makes promises to
coming back to courts at the fixed time, and it is also believed by judges that this is likely that

QUESTIONS 5
the opponent would follow over with these promises. On the other hand, In a case when the
offenders do not come back to the courts at the fixed time, then they will not misplace cash or
properties, however failure to appear in courts is still an offence.
In this way, the unsecured bonds are not same as secured bonds. They are different from each
other. These bonds are not backed by any assets whatsoever, only by best belief and credit of
the issuers. If the company of good reputation which has been around for the long period
problems the bonds, then the bonds are not measured as very risky. On the other hand, when
the bonds are issued by the comparatively new corporation or one with the company having
bad credit ratings, hold onto the place. There is the high risk element included with unsecured
bond, so they are established carefully. Generally, unsecured bonds only awarded to the
offender in a case when charges are not the major offence like the traffic contravention or
certain same misbehaviour. Additionally, the magistrate would consider the criminal past
while deciding the types of bail to set. The secured bonds are seen as not risky
as unsecured bonds. The reason is that the investors are rewarded at least somewhat for the
investments in the incident of defaulting.
Answer 3:
1. Equity shares
Equity share is considered as main resource of finance meant for the organisation
providing investor the right to vote, share profits and claims over the asset. Equity
shares are the shares that are ordinary in the course of businesses of company. The
equity shares are also considered as the ordinary shares. There are various kinds
of equity share capital that are authorized capital, issued capital, and subscribed
capital, paid up capital, right, and bonuses.

QUESTIONS 6
The equity share holders do not enjoy preference in respect of dividend’s payment
and capital’s payment. The dividend is paid out of the profits of company to the
equity shareholders. The equity share holders are members of an organisation. These
share holders have voting rights. It can say that the equity shares are the very
important source to raise the long-term capital.
In the addition of this, equity shares state entity’s ownership and capital raised by
issuer of share is known as capital’s ownership or the funds of owner. They are
considered as base for a formation of organisation. The equity shareholders are paid
as per the company’s earning not obtain the fixed dividends. They are known as the
residual owners. They achieve what is left after other entitlements on earning and
asset of organisation have arranged. By the voting rights, the shareholder has rights to
take participation in an organisation’s administration.
Advantages of equity shares
There are numerous advantages of equity shares. The advantages are following-
 Investor who desires to take the huge risk for high return chooses equity shares.
 Organization has no burden, as the dividend payment to equity shareholders is not
necessary.
 Equity issues raise fund without making the charges on entity’s asset.
 Voting rights of equity shareholders make them have democratic control over
company’s administration
 It is the base of the company’s capital.
 It also renders the creditworthiness to an organization and self-assurance to
prospective loans provider.

QUESTIONS 7
Disadvantages of Equity Shares
There are also certain disadvantages of equity shares. These drawbacks are explained
below-
 Investor who prefers stable earning cannot choose equity shares.
 The equity share’s cost is higher than the cost of raising funds by the sources.
 Various official procedures and procedural delay are included. They are time taking
procedure
 The issues of additional equity shares dilute voting powers and the income of present
holders of equity shares.
2. Preference shares
Preference shares are considered as shares that promise the fixed dividend’s holders,
whose payments have main concern over which of ordinary share dividends. The
capital raised by an issue of preference shares is considered as the preference share
capital. The preference shareholder has the privileged claims over dividend as well as
payment of capital in comparison of the holders of equity shares.
The preference shares have certain features of the debentures as well as equity shares.
The holders of preference share normally do not have the voting rights in company. In
some matters, the preference share holders can claim the voting rights in a case when
the dividend is not paid for the 2 years or more than 2 years over cumulative
preference shares and 3 years or above over the non-cumulative preference shares.

QUESTIONS 8
Preference share’s Types-
1. Cumulative and Non-Cumulative
They are preference shares that have the right to get unpaid dividend in upcoming
period, within matter the same are not paid during the period, are considered as
cumulative preference shares. The non-cumulative shares are shares over which the
dividend is not collected if this is not paid within specific time.
2. Convertible and Non-Convertible:
Convertible preference shares are reference shares that may be transformed in equity
share in the particular time. Conversely, non-convertible shares are the shares that
may not be changed in equity shares.
3. Participating and Non-Participating:
Participating preference shares are shares that contain the rights to take participation
within the extra surplus of the share of company which after dividend at the specific
rate has paid on equity shares. These non-participating preference shares do not have
this right of get participation in organization’s profits.
Advantages of Preference Shares
 These shares do not influence the control of holders of the equity shares over
administration as the holders of preference shares don’t contain the voting right.
 These shares have rationally fixed earnings in a type of fixed rate of return and
investment’s security.

QUESTIONS 9
 Preference capitals do not make the any type of charges against the organization’s
assets.
 The payment of fixed dividend to these shares can create the organization to announce
high rate of dividend for the holders of equity shares in best period.
Drawbacks of Preference Shares
 The dividend rates on preference shares are usually higher than interest rate on the
debentures.
 These shares are not preferred by the investor who is desiring to get the risk sand are
interested in high returns.
 The dividend paid cannot reduce from profit as the expenditure. In this way, there are
no tax savings as in a matter of interest on loan.
 Preference capital dilutes entitlements of holders of equity shares on company’s
assets.

QUESTIONS 10