Question

how does a bond work? what are the advantages do you think of a company issuing a bond over stock? what are the disadvantages?

Answer 1

Bonds are issued by a company to raise money from people in return for fixed payments made either monthly, quarterly or annually. At the end when the bond matures the FV of the bond is also returned back to the investors.

When a company issues a bond over a stock:

• The company has to pay interest to the bond holders. Interest is tax-deductible and offers tax advantages to the company due to issuing bonds over stock. So, it can reduce the amount of taxes a company owes.
• Access to capital through bond issue is much faster, than issuing stock . Issuing shares leads to dilution of ownership in the company, but bond issue there is no dilution of ownership.
• Issuing shares is more expensive and bond issue is a more cheaper form of raising money.

The stock holders are paid dividends which is not tax deductible.

The disadvantages are :

• the bond holders have to be paid, irrespective of the financials of the company. In case, a firm is unable to pay the bond holders then it can lead to bankruptcy or liquidation of the company assets. So, raising funds through issue of bonds is risky.