Advantages of Issuing Bonds

27.06.2013

There are two ways for companies to raise funds. An excellent way is through sale of stock, meaning selling a little part of your company. In case the company’s performance is good, its stockholders benefit by way of dividends, but when the performance of the company isn’t to expectations, the price of its stock nosedives. Bonds represent debt that the company owes to its investors and pays them a predetermined rate of interest, depending on the type of bond.

Features:

One of the advantages of issuing bonds is that it allows the company to raise funds without allowing investors to have any control over its operations. Usually, it’s safer to invest in bonds. That’s because of their certainty to pay interest to investors and convenience of selling. It’s always safe to buy bonds of companies with good credit rating.

Function:

The chief purpose of issuing bonds is to collect funds from the market. On issuing bonds, the company is obliged to pay interest to investors and payback the invested amount at the expiry of bond period. This could cause financial strain to struggling companies, which may fail to payback principal and or interest to their investors. Nevertheless, bonds assure regular income for investors in the form of interest to be paid by the company every three or six months, enabling investors to plan their finances. This assured return on investment prompts people to prefer this mode of investment, compared to stocks, the prices of which keep fluctuating.

Benefits:

Advantages of issuing bonds also include the opportunity for company to enhance it credit rating by issuing limited quantity of bonds that it can manage expediently. Firms experiencing pressures of cash flow and performance can significantly enhance their credit rating by issuing bonds, thus attracting investors to invest their funds with the company.

Consequences:

Issuance of bonds carrying fixed rate of interest brings the company under debt but benefits the company. On the other hand, bonds that do not carry a fixed rate of interest could cause financial problem to issuing company when the market rates of interest go up as the company would be required to pay an increasing rate of interest as well the principal amount. So, it’s easier for companies to manage bonds carrying a fixed rate of interest. When there is no apprehension of increased rates of interest or inflation, it’s advantageous to issue bonds.

Considerations:

The income as interest from bonds falls under tax deductibles. That’s certainly among the most important advantages of issuing bonds.  Companies are not required to disburse dividends on capital stock as they can certainly utilize that additional cash for expansion.  The drawback is that investors will not be prompted to invest in such companies as they like to get dividends, necessitating the need of variable dividends.  Payment of dividends doesn’t fall under tax deductibles.

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