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Financial Accounting 10th Edition

Financial Accounting (10th Edition)

Book Edition10th Edition
Author(s)Libby, Libby
ISBN9781259964947
PublisherMcGraw-Hill, Inc.
SubjectAccounting

Chapter 10, End of Chapter, Questions, Exercise 1

Page 550

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A bond is a legal financial instrument issued by the company to borrow money from the market, which includes municipal bonds and corporate bonds.

Explanation

Bonds are long-term debt liabilities and the investor of these bonds do not become the stockholders' of the company. It restricts them to participate in the sharing of returns and diluting the ownership.

 

The interest charged on long-term debt is tax-deductible and makes bonds a favorable option for the company.

Verified Answer

Common stock dilutes the stockholders' interest in the company, while bonds do not have any effect on the ownership of the company. Instead, bonds increase the return on equity. Also, there is tax deduction available on the interest paid on bonds.

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