1. How does financing with bonds differ from financing with stock? Think about this in terms...

1. How does financing with bonds differ from financing with stock? Think about this in terms of company ownership and risk to company. Why not borrow money from a bank?

Expert Solution

When you issue bonds, you get the capital from investors with a promise that you'll be paying interest and principal back in a certain period of time. Payments can also be periodic.The ownership structure of the company does not change. The investors do not share in the company profits and will be first in line to receive liquidation payments if the company defaults. The risk to the company is that they have to abide by certain rules and must have cash available to pay coupon payments.

Whereas while issuing stocks, you get the capital and the investors become shareholders of your company. Now they own some part, however large or small, of the company. They share the risks and rewards in the company. The risk of the company is that you'll have to share company information periodically with the investors and reporting requires effort and money.

The interest rate companies pay bond investors is often less than the interest rate they would be required to pay to obtain a bank loan. Issuing bonds also gives companies significantly greater freedom to operate as they see fit because it releases them from the restrictions that are often attached to bank loans

jeff jeffy answered 4 months ago

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