Question

From the standpoint of the issuing company, what is a disadvantage of using bonds as a means of long-term financing?

A: The bondholders do not have voting rights.
B: Income to stockholders may increase as a result of trading on the equity.
C: Interest must be paid on a periodic basis regardless of earnings.
D: Bond interest is deductible for tax purposes.

Answer 1

The main disadvantage of using bonds for long-term financing from a company's perspective is the obligation to make periodic interest payments, regardless of whether the company is earning enough profits.

Step-by-step explanation:

From the standpoint of the issuing company, one disadvantage of using bonds as a means of long-term financing is that interest must be paid on a periodic basis regardless of earnings. Unlike equity financing, where payments to shareholders (dividends) are not mandatory, bond financing requires regular interest payments. This can be particularly burdensome for a company if it is going through a period of low or no profits, as these interest obligations still need to be met, potentially eating into the company's cash reserves and affecting its liquidity.