Final answer:
The purpose of purchasing bonds as an investment is understood as an outflow of cash from investing activities, where the investor expects to earn a rate of return that includes compensation for delayed consumption, inflation protection, and a risk premium. Bonds are favored for their income-generating ability and for allowing firms to retain control over operations.
Step-by-step explanation:
The purpose of purchasing bonds as an investment is typically to generate an inflow of cash from investing activities, which is recognized in a company's financial statements. When an investor buys a bond, they are lending money to the issuer, which might be a government or corporation. In exchange for this loan, the investor receives periodic interest payments and the return of the principal upon maturity. The purchased bond represents an investment and is not categorized under operating or financing activities within the cash flow statement. Instead, investing in bonds is an outflow of cash from investing activities because the investor is using cash to buy a financial asset with the expectation of future income.
Bonds are considered an attractive option for investors looking to earn a rate of return that compensates for delaying consumption, provides an inflation hedge, and reflects a risk premium based on the borrower's creditworthiness. Early-stage investors may see bonds as a less risky alternative compared to stocks, particularly if prioritizing steady income through interest payments over potential capital gains. The specific choice between alternatives such as reinvesting profits, borrowing through banks or bonds, and selling stock hugely depends on a company's situation and financial objectives. The decision to issue bonds instead of stocks allows a company to retain control over its operations, as it does not dilute ownership through the issuance of additional equity.