Question

2. Explain why companies issue bonds to finance operations. Why do companies prefer bonds than loans when they need to borrow?

Answer 1

Companies Issue bonds to finance operation for several reasons:

i)Bond Financing provides a way to raise captal without giving up any control of the company.

ii)The interest rate that companies pay to the bond investor is usually less than the interest rate available from banks.By issuing bonds directly to the investors,company can eliminate the banks as middlemen in the transactions.Without the intermediaries,the borrowing process becomes more efficient and less expensive.

iii)By issuing bonds,companies can often borrow money for a fixed rate for a longer term than it could at a bank .Most banks will not make fixed rate loans for longer than five years because they fear losing money if their cost of funds rises to a higher rate than long term loans.Most companies want to borrow money for long term and so elect to issue bonds.

iv)By issuing bonds, the borrower is spared the task of undergoing numerous separate negotiatios and transactions in order to raise capital it needs.