Final answer:
Small companies often raise funds from private investors to avoid the complexities of an IPO. Venture capitalists tend to have better information about a small firm's profit potential than bondholders due to their involvement. Similarities and differences between bonds and bank loans center on repayment structures and obligations.
Step-by-step explanation:
Early-Stage Corporate Finance and Capital Structures
Very small companies tend to raise money from private investors rather than through an Initial Public Offering (IPO) because of the costs, complexities, and regulatory requirements associated with going public. Private investment is more accessible and can be tailored to the company's immediate needs.
Small, young companies might prefer an IPO to borrowing from a bank or issuing bonds as it allows them to raise large amounts of capital without incurring debt, and it can provide liquidity for the founders and early investors.
A venture capitalist typically has better information about the profitability potential of a small firm compared to a potential bondholder. This is due to the intensive due diligence process venture capitalists perform before investing and their ongoing involvement with the firm post-investment.
From a firm's perspective, both a bond and a bank loan represent borrowed capital that must be repaid with interest. They are similar in that they are both forms of debt financing, but they differ in terms of the structure, funding source, repayment terms, and level of regulatory oversight.
Fred, who bought a $200,000 house with a 10% down payment, would have $20,000 in equity and would owe $180,000 on a mortgage loan.