Final answer:
Corporations issue convertible bonds to raise equity capital with minimal ownership dilution and because they're easier to sell, especially with poor credit ratings. Bank borrowing suits smaller firms, while larger companies often prefer bonds to finance major investments or acquisitions. Bonds are debt agreements with scheduled repayments and interest.
Step-by-step explanation:
Corporations may choose to raise financial capital through various means such as bank loans, issuing bonds, or offering stock. Issuing convertible bonds is a strategic method used by companies for two main reasons. First, it allows raising equity capital without relinquishing more ownership than necessary since bonds can be converted into a predetermined number of shares, giving investors the choice to convert their bond investment into equity if the company performs well. Second, convertible debt is often easier to sell compared to traditional bonds, especially if the company has a less favorable credit rating. Additionally, convertible bonds can be attractive to investors because they provide potential upside through conversion to equity while also offering downside protection as a bond.
While bank borrowing is more tailored to the need of smaller firms due to the closer banking relationship, larger and well-known firms generally opt to issue bonds. Bonds provide a mechanism to procure substantial amounts of financial capital for investing, refinancing, or acquisitions. Furthermore, although issuing stock can be a way to access capital, it dilutes company ownership and introduces new accountability to shareholders, which might not be desirable for some firms.
Bonds, including corporate bonds, are financial contracts where a borrower commits to paying back the borrowed amount plus interest over a specified period. Municipal, state, and Treasury bonds are other forms of bonds, constituting debt securities issued by various levels of government.