Final answer:
If a company's earnings are large enough to permit paying excess interest when a fixed-period option has been chosen, it means the company has the financial stability to cover the interest payments and potentially make additional payments. This can attract more investors and raise more capital for the company. However, there is always a risk involved, as the company may not have sufficient assets to fully repay the bonds.
Step-by-step explanation:
When a large company has significant earnings, it can borrow money by issuing bonds. For example, a company might issue bonds for $10 million, with an annual interest rate of 8%. Over a fixed period, the company will make interest payments and then repay the borrowed amount. The firm may divide the total amount it wishes to raise into smaller bonds, allowing individual investors to loan the firm a smaller amount.
If a company's earnings are large enough to permit paying excess interest, it means that the company has enough revenue to cover the interest payments on the bonds and potentially make additional payments. This can be beneficial for the company, as it allows them to attract more investors and raise more capital. It also demonstrates financial stability and credibility, making it easier for the company to borrow money in the future.
However, it's important to note that there is always a risk involved in borrowing money through bonds. If a company fails to make the promised interest payments, bondholders can take legal action to require the company to pay. However, there is no guarantee that the company will have sufficient assets to fully repay the bonds, and bondholders may only recoup a portion of what they loaned to the firm.