Chapter 14, Problem 1QS

To determine

Concept Introduction:

Bond:

A bond is the debt security or an instrument where the issuer of bond has liability to bondholders to pay off the principal debt at the maturity date along with the interest rate or coupon rate agreed.

Interest is to be paid by the issuer on periodic basis, semi-annual basis or annual basis as per the agreed terms of the bond contract.

To identify:

The advantage or disadvantage of the given description based on the features of the bond financing.

Explanation of Solution

a. Bonds do not affect owner control-Advantage

b. A company earns a lower return with borrowed funds than it pays in interest-Disadvantage

c. A company earns a higher return with borrowed funds than it pays in interest-Advantage

d. Bonds require payment of periodic interest-Disadvantage

e. Interest on bonds is tax deductible-Advantage

f. Bonds require payment of par value at maturity-.Disadvantage