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The Bond Issue Size Decision

Published online by Cambridge University Press:  19 October 2009

Harold Bierman
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Extract

The highly quantitative bond issue size decision is generally made in a somewhat qualitative manner. The subjective opinions of brokers and intuitive rules of thumb of financial officers are rarely, if ever, compared to the optimum issue size resulting from calculations incorporating the costs of issuing bonds, and the costs of carrying extra cash. Unfortunately performance measurement in this area is very difficult, thus both good and bad decision processes tend to go unnoticed. It is possible to look at a financial decision which has been made, and, with the aid of hindsight, conclude it was a bad decision, but this proves very little. Some financial officers have done very well administering the Financial affairs of their corporations, but this does not indicate that the decision process cannot be improved. In a previous article the author of this paper investigated the question of the optimum size of bond issue.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 1 , Issue 4 , December 1966 , pp. 1 - 14
Copyright
Copyright © School of Business Administration, University of Washington 1966

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References

1 See “Financial Decisions and New Decision Tools,” The Financial Executive (May, 1964), pp. 23–30Google Scholar, co-authored by McAdams, Alan K. and the present author. Also, Management Decisions for Cash and Marketable Securities, by the same authors(Graduate School of Business and Public Administration, Cornell University, 1962).Google Scholar

2 The use of the formula requires that ks. > k/2. If ks = k/2 we have a situation where Q is not defined, since we are dividing by zero. If ks were less than k/2, Q would be an imaginary number using the above formula, which is not a feasible solution. See the appendix to this paper for the derivation of the formulae.