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.
More from this Section
- Raw materials
Raw materials are the basic goods that will be used in production but have not yet been ...
- Honor of notes receivable
A note is honored when its maker pays it in full at its maturity date. For an interest ...
- Total labor variance
Total labor variance is the difference between actual hors times the actual rate and standard ...
Depreciation is the process of allocating to expense the cost of a plant asset over its ...
- Unsecured bonds
Unsecured bonds, also called debenture bonds, are issued against the general credit of ...