Definition

Bonds

Bonds are a form of interest-bearing notes payable issued by corporations, universities, and governmental entities. Bonds offer three advantages over common stock, as shown in Illustration below:

 

Advantages of Bonds

1.      Stockholder control in not affected.

Bondholders don’t have voting rights, so current owners (stockholders) retain full control of the company.

2.      Tax savings result.

Bond interest is deductible for tax purposes dividends on stock are not.

3.      Earnings per share may be higher.

Although bond interest expense reduces net income, earnings per share o common stock often is higher under bond financing because no additional shares of common stock are issued.

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