Final answer:
The amount a company pays to borrow money or as a return on investment is known as interest or dividends. Bonds are a debt instruments that companies use to raise capital by promising fixed-interest payments to bondholders, who can take legal action if payments are not made. Unlike bonds, issuing stock may not obligate a company to make payments except in the form of dividends.
Step-by-step explanation:
The amount that a company must pay to either borrow money or to owners as a return on their investment is called interest or dividends. Large companies often issue bonds to raise capital, promising to pay the bondholders a specific interest rate. For instance, a company may issue bonds worth $10 million with an annual interest rate of 8%, equating to $800,000 in interest payments each year.
After a certain period, such as 10 years, the company will repay the borrowed $10 million. Bondholders are the investors who receive these interest payments, and in case the firm fails to make these payments, they may take legal action to attempt to recover their funds, although full recovery is not guaranteed.
On the other hand, if a company issues stock, it may not be obligated to make payments to shareholders except in the form of dividends, which are not mandatory. Unlike bond interest, dividends can be decided upon by the company's board and can be variable or non-existent, especially if the company reinvests profits for growth. Additionally, venture capitalists are investors who may provide capital while gaining substantial control and insight into the company's management, reducing the risk presented by imperfect information.