Why Would a Company Prefer to Issue Bonds Instead of Issuing Stocks to Obtain Financing?

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Well-established corporations have the option to issue bonds as well as stock to investors.
Well-established corporations have the option to issue bonds as well as stock to investors. (Image: financial section image by Chad McDermott from Fotolia.com)

Publicly traded companies raise capital for their operations by issuing stocks and bonds to investors who supply the capital. By issuing bonds instead of stock, the company benefits from the use of investor funds without giving up ownership.

Bonds are Loans

A bond is a loan that investors make to a company. Stocks represent an ownership stake that an investor has. By raising money through bonds, a corporation can avoid issuing more shares, which dilute the ownership interest of existing stockholders.

Bonds are Easier to Sell

Bonds can guarantee a steady stream of income to investors and repayment of the initial loan amount when the bond matures. Investors often prefer purchasing bonds rather than stocks from companies that have a long history of stable dividend payouts.

Bonds are Tax Deductible

Interest payments made to bondholders are deductible on the corporation's income tax return. Dividend payments to shareholders are not deductible. The tax deductibility of bond payments contributes to the lower cost of companies issuing bonds instead of stock.

Call Provisions

If interest rates decline, companies often have to option to pay back the principal amount to bondholders before the bond matures. This allows to company to eliminate the old debt and issue new bonds at a lower interest rate.

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