A disadvantage of bonds is:
A) Bonds require payment of periodic interest.
B) Bonds require payment of principal.
C) Bonds can decrease return on equity.
D) Bonds may not create financial leverage.
E) All of these answers are correct.

Question

Quizplus · Accepted Answer

All of the choices are disadvantages of bonds. Bonds require payment of periodic interest, which reduces the income available for equity holders. Bonds also require payment of principal at maturity, which can create cash flow issues for the issuer. Additionally, issuing too many bonds can decrease the return on equity as the interest payments to bondholders reduce the earnings available for shareholders. Finally, bonds may not create financial leverage if the issuer already has a high debt-to-equity ratio, limiting the potential benefits of issuing bonds.

A Disadvantage of Bonds Is