A disadvantage of bond financing is:
A)Bonds do not affect owners' control.
B)Interest on bonds is tax deductible.
C)Bonds can increase return on equity.
D)It allows firms to trade on the equity.
E)Bonds require cash payments of periodic interest and the repayment of par value at maturity.

Question

Quizplus · Accepted Answer

Bonds require cash payments of periodic interest and the repayment of par value at maturity. This can be a disadvantage because it requires the company to have a reliable source of cash flow to make the required interest payments and to repay the bond at maturity. Failure to do so can result in default and damage to the company's credit rating.

A Disadvantage of Bond Financing Is