Why Would a Company Issue Bonds Instead of Selling Stock?

When a company issues stocks, it is offering investors ownership in the company. When a company issues bonds, it is asking for a loan, rather than offering ownership in the company.

Ownership

A company may decide to issue bonds instead of stock because it does not want to change company ownership percentages. To keep the ownership percentages the same, the company will often issue bonds instead.

Share Dilution

If a company already has issued stocks, it can choose to issue a secondary stock offering, but that will dilute the shares of all outstanding stock. A dilution in shares means the stock is less valuable. A company will issue bonds instead of selling additional stock to maintain the value of the stock.

Tax Deduction

Companies pay capital gains taxes on the income they make on the sale of both stocks and bonds. Unlike stocks, the company pays interest to its bondholders. The company can deduct the interest it pays to its bondholders from its taxes. This tax deduction may be reason enough for a company to issue a bond instead of stock.

References

• Financial Web: Corporate Bonds
• Accounting Scholar: Issuing Bonds Payable