The following points highlight the top four ways of financing available to a company. The ways are: 1. Bonds 2. Equity 3. Preference Shares 4. Hybrid Convertibles or Convertible Bonds.
Way # 1. Bonds:
A bond is a security promising to pay a certain sum of money in interest every year for a number of years until it matures. Payments are to be made in time, irrespective of whether the company is making profit or loss. So, it is a (fixed money) liability of a company.
Way # 2. Equity Shares:
Equities are also called ordinary shares. They differ from bonds in that an ordinary shareholder shares in profits and remains in control of business decisions. He shares in losses, too. A shareholder is paid dividends on the basis of actual returns profits earned by a company after meeting its fixed obligations. So, shares or equities are assets of the company (compared to debentures which are liabilities).
Way # 3. Preference Shares:
Preference shares pay a stated dividend—says, a fixed 5% on the face value of the share purchased, irrespective of profit and loss. So, the holder of such shares can get dividend even when profit is low. In fact, preference shareholders have the first claim to dividends.
Way # 4. Hybrid Convertibles or Indexed Bonds:
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In times of inflation, bondholders lose in real terms because they get back the principal that has gone down in purchasing power. To protect the investors some corporations have started issuing convertible or indexed bonds which act as inflation hedges. These bonds are convertible into ordinary shares. Due to this built-in flexibility these bonds can be sold at low rates of interest, i.e., at high prices. (Note that bond prices are the reciprocal of the rate of interest).
Some Indian companies like Tata Chemicals have issued such convertible bonds. Finally, some companies issue warrants, which are options to buy ordinary shares at some stated exercise price until some future date. Thus, Tata & Sons Ltd. may issue a warrant good until 1989, which permits one to buy an equity share by paying Rs. 100 of exercise price.