The cost of capital raised by the issuance of bonds is typically lower than the cost of capital raised from the issuance of preferred stock or common stock.

Question

Quizplus · Accepted Answer

Bondholders are given priority in case the company declares bankruptcy, which reduces the risk for investors. Therefore, they accept a lower rate of return compared to investors in preferred or common stocks who face higher risk. This lowers the cost of capital for the company.

The Cost of Capital Raised by the Issuance of Bonds