A disadvantage of bond financing is:
A) Bonds do not affect owners’ control.
B) Interest on bonds is tax-deductible.
C) Bonds can increase return on equity.
D) It allows firms to trade on equity.
E) Bonds pay periodic interest and the repayment of par value at maturity.
The Correct Answer for thegiven question is E) Bonds pay periodic interest and the repayment of par value at maturity.
Bond financing is a form of long-term borrowing used frequently by state and local governments to raise money for long-lasting infrastructure projects. Governments raise money by selling bonds to investors. As a result, they promise to repay this money, with interest, according to specific schedules.
Disadvantages of bond Financing
- The sale of bond is harder than common stock
- Bond is the riskiest source of financing in that sense, the failing of any interest payment and principal at a specified time may take the company into bankruptcy.
- The negative and restrictive covenants may limit the company’s future operating flexibility in the future.
- The permanent financial burden to the company, since companies have to pay fixed interest for a long time.