Question

An advantage of selling bonds to raise long-term capital is that

A) bonds increase the market’s perception of the firm.
B) bonds do not have to be repaid.
C) bondholders have voting rights.
D) interest paid on bonds is a tax-deductible expense.

Answer 1

The key advantage of selling bonds to raise capital is that the interest paid on the bonds is a tax-deductible expense for the company.

Step-by-step explanation:

An advantage of selling bonds to raise long-term capital is that interest paid on bonds is a tax-deductible expense. Unlike equity financing, where issuing stock results in selling off company ownership to public shareholders, using debt to raise funds allows the firm to maintain control over its operations. Bonds do, however, have to be repaid, and bondholders do not have voting rights, unlike shareholders.

When a firm issues bonds, it is borrowing money from investors with the promise to repay the principal along with interest. These scheduled interest payments are considered a cost of doing business and can be deducted from the company's taxable income, which can reduce the overall tax liability of the firm. This tax deduction is a significant advantage over equity financing, where dividend payments to shareholders are not tax-deductible.