Final answer:
Bonds are issued in small denominations allowing individual investors to purchase them. If a company fails to make payments, bondholders can take legal action, though full recovery is not guaranteed. Thus, smaller denominations facilitate easier purchases and trading by individuals in the secondary market.
Step-by-step explanation:
Bonds are often issued in smaller denominations to facilitate broader investment opportunities. For instance, when a large company wants to raise funds, instead of issuing a single bond for a massive amount, the company might break it down into more manageable pieces, such as 10,000 bonds at $5,000 each. This strategy enables individual investors to participate by purchasing bonds in amounts they can afford. As bondholders, they receive interest payments and, ultimately, the repayment of the principal.
If the issuing company runs into financial trouble and cannot make the promised interest or principal payments, the bondholders have the right to take legal action. In such situations, the company might be required to sell its assets to pay its debt. Nevertheless, there is a risk involved as there is no guarantee a firm will have enough assets to satisfy the bond obligations fully, and investors may only recover a portion of their investment.
Given this structure, the correct answer to the question is that because bonds are usually sold in small denominations, .