Final answer:
Companies may finance through bonds to avoid ownership dilution and maintain control, offering flexibility and potential tax benefits. Investors might choose bonds at a discount for higher yield, premium for better interest rates, or par for stability, depending on their strategy and market conditions.
Step-by-step explanation:
A company may choose to finance through bonds payable instead of issuing stock or borrowing from a bank for several reasons. Issuing bonds allows firms to raise large amounts of capital without diluting ownership or control, as they would by issuing stock.
Furthermore, unlike bank loans, bonds provide flexibility in capital structuring and may offer tax advantages. Bondholders, who lend money to the firm, receive interest payments and have a claim on the firm's assets in case of default, though there is no guarantee that they will recoup their entire investment.
As an investor, whether you would prefer to invest in bonds issued at a discount, premium, or par depends on your investment strategy and market conditions. Buying at a discount may offer a higher yield if held to maturity, while buying at a premium could make sense if the bond's interest rate is higher than current market rates. Buying at par might be preferred if the bond offers a competitive interest rate with less price volatility.