When a corporation issues a bond
A)the purchaser of the bond assumes ownership rights in the corporation.
B)it is making a promise to pay interest each year and to repay the principal at a stated time in the future.
C)it is called equity capital.
D)it is called financing through the stock market.
E)it is making a promise to pay interest each year but not repay the principal.

Question

Quizplus · Accepted Answer

When a corporation issues a bond, it is essentially borrowing money from investors. In exchange for the bond, the corporation is promising to pay interest each year (which is the return for the investor) and to repay the principal (the amount borrowed) at a stated time in the future. The purchaser of the bond does not assume ownership rights in the corporation (choice A), and bonds are not called equity capital (choice C) or financing through the stock market (choice D). While a corporation may issue bonds that do not require repayment of the principal (choice E), these are less common and typically have higher interest rates to compensate for the increased risk.

When a Corporation Issues a Bond