For this week's discussion:
Explain corporate bond interest in terms of cost of capital versus investor yields. Also,
explain the municipal bond interest in terms of investor yields.
The discussion of the current week revolves around the concept of Corporate Bonds and investor
yield, where corporate bond is a form of debt security by corporate to investors. (Heisinger,2012). The
bond is a form where corporate or organizations gain money from investors in order to run their
operations and in return the investor is guaranteed with a fixed interest rate, along with principle amount,
to their investment after a fixed period of time (SEC, 2018).
The principle of bond allocation revolves around the origination’s need for increasing their cost of
capital and investors motive of gaining yield to their investment. In corporate, the cost of capital creates a
critical parameter in deciding their operations and moreover it has a direct implication on their WACC.
The cash-inflow through bonds would help an organization /corporate to fund their operations and
generate profit. This would help them grow faster without using an external debt loan process. On the
contrary, the bond funds must be returned with a yield return which adds on to their cost of debt and
hence increases their WACC (CFI, n.d.). In such case, it becomes crucial for the corporate to generate
enough profits, from high cost of capital retrieved through bonds, to overcome their cost of debt and
create a profitable business.
The municipal bonds are the debt securities issues by government, municipalities, states and other
political groups for a variety of purposes like financing public infrastructure development such as
schools, roads, water system and day to day government operations (SEC, 2018). They operate same as
corporate bond where the money is invested by an investor against a assured yield against the principle
money invested however the yield return could be less in municipal bonds as compared to corporate bond
due to their low risk profiling.
Hence, proper consideration to bond type, i.e.., corporate or municipal bonds, may vary depending on
their risk profiling and investor yielding capability.
REFERENCES
1. SEC (2018). What Are Corporate Bonds? Retrieved 08-12-2019 from
https://www.sec.gov/files/ib_corporatebonds.pdf
2. Hill, R. A. (2014). Strategic financial management. Bookboon.com. Retrieved from
https://bookboon.com/premium/api/library/12d7ee13-0f5e-e011-bd88-22a08ed629e5/download/
pdf
3. Finance for Managers. (2012). Licensed under Creative Commons by-nc-sa 3.0. Retrieved from
https://2012books.lardbucket.org/pdfs/finance-for-managers.pdf
4. Heisinger, K., & Hoyle, J.B. (2012). Accounting for Managers. Saylor Foundation. Retrieved
from https://resources.saylor.org/wwwresources/archived/site/textbooks/Managerial
%20Accounting.pdf
5. CFI (n.d.). Cost of Capital. Retrieved 08-12-2019 from
https://corporatefinanceinstitute.com/resources/knowledge/finance/cost-of-capital/
6. SEC (2018). Investor Bulletin: Municipal Bonds – An Overview. Retrieved from
https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_munibondsoverview
Explain corporate bond interest in terms of cost of capital versus investor yields. Also,
explain the municipal bond interest in terms of investor yields.
The discussion of the current week revolves around the concept of Corporate Bonds and investor
yield, where corporate bond is a form of debt security by corporate to investors. (Heisinger,2012). The
bond is a form where corporate or organizations gain money from investors in order to run their
operations and in return the investor is guaranteed with a fixed interest rate, along with principle amount,
to their investment after a fixed period of time (SEC, 2018).
The principle of bond allocation revolves around the origination’s need for increasing their cost of
capital and investors motive of gaining yield to their investment. In corporate, the cost of capital creates a
critical parameter in deciding their operations and moreover it has a direct implication on their WACC.
The cash-inflow through bonds would help an organization /corporate to fund their operations and
generate profit. This would help them grow faster without using an external debt loan process. On the
contrary, the bond funds must be returned with a yield return which adds on to their cost of debt and
hence increases their WACC (CFI, n.d.). In such case, it becomes crucial for the corporate to generate
enough profits, from high cost of capital retrieved through bonds, to overcome their cost of debt and
create a profitable business.
The municipal bonds are the debt securities issues by government, municipalities, states and other
political groups for a variety of purposes like financing public infrastructure development such as
schools, roads, water system and day to day government operations (SEC, 2018). They operate same as
corporate bond where the money is invested by an investor against a assured yield against the principle
money invested however the yield return could be less in municipal bonds as compared to corporate bond
due to their low risk profiling.
Hence, proper consideration to bond type, i.e.., corporate or municipal bonds, may vary depending on
their risk profiling and investor yielding capability.
REFERENCES
1. SEC (2018). What Are Corporate Bonds? Retrieved 08-12-2019 from
https://www.sec.gov/files/ib_corporatebonds.pdf
2. Hill, R. A. (2014). Strategic financial management. Bookboon.com. Retrieved from
https://bookboon.com/premium/api/library/12d7ee13-0f5e-e011-bd88-22a08ed629e5/download/
3. Finance for Managers. (2012). Licensed under Creative Commons by-nc-sa 3.0. Retrieved from
https://2012books.lardbucket.org/pdfs/finance-for-managers.pdf
4. Heisinger, K., & Hoyle, J.B. (2012). Accounting for Managers. Saylor Foundation. Retrieved
from https://resources.saylor.org/wwwresources/archived/site/textbooks/Managerial
%20Accounting.pdf
5. CFI (n.d.). Cost of Capital. Retrieved 08-12-2019 from
https://corporatefinanceinstitute.com/resources/knowledge/finance/cost-of-capital/
6. SEC (2018). Investor Bulletin: Municipal Bonds – An Overview. Retrieved from
https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_munibondsoverview
