Question

Each of the following are advantages of bonds except a. bonds do not affect owner control b. bonds require payment of periodic interest and par value at maturity c. bonds can increase return on equity

Answer 1

Bonds require payment of periodic interest and par value at maturity, but they do not affect owner control and can increase return on equity.

Step-by-step explanation:

Bonds are debt securities that companies issue to raise money for new projects directly from investors. While bonds offer several advantages, such as providing a steady stream of income through periodic interest payments, they do have a few disadvantages. One of these disadvantages is that bonds require the payment of periodic interest and par value at maturity, which can be a financial burden for the issuer if they don't have sufficient income. Additionally, issuing bonds does not directly affect the control or ownership of the company, as it maintains control of its operations and is not subject to shareholders.

Answer 2

The disadvantage among the listed advantages of issuing bonds is that they require periodic interest payments and repayment of par value at maturity, which could strain the firm's finances. Issuing bonds still preserves owner control and can potentially increase return on equity, in contrast to issuing stock, which dilutes ownership and control.

Step-by-step explanation:

The question asks about the advantages of issuing bonds for a firm, except for one specific disadvantage. Among the options given, the correct disadvantage is that 'bonds require payment of periodic interest and par value at maturity.' This means that the firm commits to scheduled interest payments, regardless of its income situation, which can be a significant financial burden. The advantages, however, include that bonds do not affect owner control because they do not dilute equity, and they can increase return on equity since the company is leveraging debt to generate more profits without issuing more stock.

On the other hand, issuing stock means selling off part of the company's ownership, which can affect control as the firm becomes responsible to a board of directors and shareholders. Accessing financial capital through bonds is a strategic decision that a firm makes based on its financial goals and the current state of the market, taking into consideration interest rates and the firm's creditworthiness.