Introduction to Finance

registered bonds
 
in that the 
issuer knows the bondholders’ names and interest payments are sent directly to the bond-
holder. 
Bearer bonds 
have coupons that are “clipped” from the side of the bond certifi cate 
and presented, like a check, to a bank for payment. Thus, the bond issuer does not know who 
is receiving the interest payments. Bearer bonds are more prevalent outside of the United 
States. Regulations prevent their issuance in the United States, primarily because unscrupu-
lous investors may evade income taxes on the clipped coupons.
Bonds can be sold in the public market, following registration with the SEC, and traded 
by investors. There is a “private” market, too; bonds can be sold in a private placement to 
qualifi ed investors, typically institutional investors such as insurance companies and wealthy 
individuals. Other forms of debt capital exist in addition to bonds. Businesses can borrow 
from banks. A popular source of debt fi nancing is commercial fi nance companies, which will 
be further discussed in Chapter 16.
Who Buys Bonds? 
The U.S. Treasury has a Treasury Direct program to sell Treasury securities directly to indi-
vidual investors, but the main buyers of Treasury bonds are large institutions, such as pension 
funds or insurance companies, which hold them for investment purposes. Others, such as 
investment banks, may purchase them and then resell them to smaller investors.
registered bonds 
bonds issued in 
the United States; the issuer knows 
the names of the bondholders and 
the interest payments are sent 
directly to the bondholder
bearer bonds 
have coupons that 
are “clipped” and presented, like a 
check, to the bank for payment; the 
bond issuer does not know who is 
receiving the interest payments
Financing Sources for the Start-Up Firm
So you want to start your own business? All businesses require 
some initial fi nancial capital to carry out the fi rm’s operations. 
A service business requires less fi nancial capital than would a 
manufacturing business. Both need working capital in the form of 
inventories and possibly accounts receivable if sales are made on 
credit terms. In addition, a manufacturing business requires fi xed 
assets to manufacture the products that are to be sold.
Now that you have decided to start a new business, where are 
you going to get the necessary fi nancial capital? First, you can use 
your own assets. You may have some accumulated savings to use 
or have some fi nancial assets in the form of stocks and bonds that 
can be sold. Second, you can turn to family and friends for fi nan-
cial support. You can borrow from family members and friends or 
you can off er them a partial ownership (equity) position in the fi rm.
A small business can sometimes get outside fi nancing 
from business angels or venture capitalists. Angels are wealthy 
individuals who provide fi nancial capital to small businesses, usu-
ally during their early development. Venture capitalists organize