Bonds VS Stocks
According to Investopedia dictionary, “A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate.” (Adam Hayes) They, however define stock as a kind of financial instrument that shows ownership in a company and defines a claim on a part of the company’s assets and earnings Companies issue debts to finance their operations. They prefer to issue bonds as opposed to other kinds of debt because they find bonds to be cheaper and less restrictive.
Banks, for example, give conditions that restrict the companies’ operations. They can also increase their interest rates making it more expensive to service the loans. Stocks, on the other hand, reduces the equity of the shareholders in the company.There are a number of advantages of issuing bonds rather than stocks. The two main advantages of issuing bonds instead of stocks as a means of debt financing are that you do not have to share your profits with a third party. This is because the equity of the shareholders is not diluted as it happens when stocks are issued. It also means that when the debt is paid off, you will have no further obligations to the bondholder. The other advantage is that there are no tax consequences as the interest on the bond is deducted on the corporation’s income tax return.
There are, however, a few disadvantages of issuing bonds as opposed to stocks. If you default on bond payments, then the creditors may force you into bankruptcy. The business may have to convert its assets into cash to pay the debts and therefore go into liquidation.
Selling stock allows a corporation to raise money without the risk of bankruptcy. The corporation may also be able to take advantage of the expertise and contacts of the buyer, as the buyer will be part of the corporation.
Adam Hayes, CFA. 'Bond Definition | Investopedia'. Investopedia. N.p., 2003. Web. 20 Nov. 2015.Sharpe, William F. "Bonds versus Stocks: Some Lessons from Capital Market Theory." Financial Analysts Journal 29.6 (1973): 74-80.
Marsh, Paul. "The choice between equity and debt: An empirical study." The Journal of finance 37.1 (1982): 121-144.Bolton, Patrick, and Xavier Freixas. "Equity, bonds, and bank debt: Capital structure and financial market equilibrium under asymmetric information."Journal of Political Economy 108.2 (2000): …