An advantage 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 the equity.
E) All of these.

Question

Quizplus · Accepted Answer

All of the options listed are advantages of bond financing. Bonds do not dilute owners' control since they do not entail giving up any ownership interest, unlike equity financing. The interest payments on bonds are tax-deductible, which can lower the company's taxable income. Bond financing can increase return on equity by leveraging the company's capital structure, assuming the firm earns more on the borrowed funds than it pays in interest. Lastly, trading on the equity refers to the practice of borrowing at a lower rate of interest and investing in assets that yield a higher rate of return, which is facilitated by bond financing.

An Advantage of Bond Financing Is