Bonds can be defined as securities that will earn a fixed income and certify the bondholder’s right to obtain their capital back within a certain period. Corporations issue bonds due to various reasons. Bonds are the safest form of investment because there is a fixed interest earned over a specific period. When the corporation is under financial pressure, it implies that bondholders will get their cash back first than any other creditors owe the company. The other reason is that bonds will have material impacts, as the company may take advantage of the reduced interest rates. For this reason, the company may earn a lot from the given bonds.
Most corporate bonds are issued to act as a means of debt financing. When investors buy the company’s bond, they owe the company but do not necessarily become the company owners. This gives the organization a hedge over, and it will be secure in the coming future. The issue of bonds is relatively cheaper than any other issue, such as shares. The share will have some negative impacts on the organization. It will have to impact the company’s ownership, unlike the bonds, where the bondholders will only be owing to the company. When the bonds are issued, it means that the investors are not liable to any owner of the company. Their job is to wait for a maturity date so that they can get their dividends back in the form of investment. It is not like in terms of shares where the investors will have some control over the operation of the company.
Furthermore, the issue of bonds will reduce the tax liability of the company. This means that when the company is paying interest, it is always counted as a taxable expense, which will impact the company’s tax profit. The bonds will also allow more cash to be retained within the business. All the issued bonds always have a maturity date, which can be extended in the future. The interest is always accrued on a fixed basis, which protects against the hikes in the external interest rates.
