Question

in your opinion, does issuing bonds have more favorable than unfavorable benefits? cite examples pf both favorable and unvaborable and give your reasons for your opinion.

Answer 1

Issuing bonds for a company has both favorable and unfavorable benefits and it certainly cannot concluded if it is more favorable. Bonds can have favorable effects in terms of lower cost of capital than equity since the bond interest rate is fixed and usually the interest paid to bondholders is lesser than the dividends paid to the stockholders. The interest paid to bond holders is also tax deductible i.e. it can be deducted as an expense for tax purposes and hence saves tax expense for the business. Also, the bond interest is fixed throughout the tenure of the bond which implies that the interest paid will remain same irrespective of the profits unlike stockholders where dividends paid will have to be more with higher profits. Bonds are seen as a safer investment by investors in weak stock market conditions and hence have higher marketability making it easier for the business to raise funds in unfavorable economic conditions as well. The flipside of issuing bonds is that if the company does not make profits or has other immediate obligations, debt interest payment becomes a financial burden for the business and can crunch the liquidity position of the firm. Bonds usually carry a charge on the assets which makes it difficult to use the assets in other productive sources to make money or raise funds. Also, bonds have a fixed life and will have to be redeemed after few years which means that the company will have to accumulate funds from the issue of the bonds. On the outset it may appear that the benefits outweigh the unfavorable effects but the benefits are sustainable so as long as the company is in a good liquidity position and does not overleverage itself.