Hello,

there is a question and then I wrote my answer. I would like to know if you think that there is anything else to add.

QUESTION:

Bonds are considered as a tool to bring market discipline to a firm's management and a governance processes. Do you agree or disagree? You can justify your answers from academic and real life cases

(references required)

ANSWER:

In order for this question to be answered, it is important to define some of the terms stated on the case.

What is a bond? A bond is a loan. It is type of debt security that represents the money borrowed that must be repaid with interest, at a given point in time. Companies will use bonds either private or public and governments in all of its levels such as state government, provincial, municipality etc in order to finance operations and projects.

What is Market Discipline? Although market discipline refers to the conduct of business, at the same time it considers the interest of stakeholders. In order to ensure fairness and safety in the financial market, market discipline is aligned with the regulatory framework of regulatory bodies and promotes transparency of financial information. When regulation and law are used properly in accordance with bonds, the latter can be used in order to bring market discipline to a firm's management and governance processes. In order for governments as well as companies to finance its operations and projects, they may use bonds to raise capital. It is crucial for the issuing entity to uphold market discipline at all times as the issuance of bonds takes a lot of legal requirements and processes. It is required during the bond issuance that all essential information is publicly accessible to investors including other related entities. Furthermore equity securities, debt securities and other types of financial products, help in harnessing investors' ability to evaluate and determine the financial performance of the firm, the responsiveness of officers and managers to the feedback of the investors and the government's current condition. And thus one way to bring market discipline to issuing entities is to provide relevant and appropriate information to stakeholders. An investor will require a greater return if the issuer of the bond is riskier. For example junk bonds offer higher interest rates, however, are more likely to default. On the other hand U.S. Treasuries pay low interest payments but are they do not pose a high risk. Although bonds are in general less hazardous than stocks and at the same time more stable with low risk that provide interest payments and price appreciation, their prices can vary and collapse. Ultimately if interest rates rise then then even the price of a highly rated bond will fall.

(references required)