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:
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Advantages of Bonds |
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1. Stockholder control in not affected. Bondholders don’t have voting rights, so current owners (stockholders) retain full control of the company. |
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2. Tax savings result. Bond interest is deductible for tax purposes dividends on stock are not. |
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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. |