Why Are Bonds a Popular Source of Financing

question 45

Multiple Choice

Why are bonds a popular source of financing?

• A) because the relative cost of issuing debt is often lower than the cost of issuing equity
• B) because financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of shares
• C) because a company having cash flow problems can postpone payment of interest to bondholders
• D) because the bondholders can always convert their bonds into shares if they choose

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Definitions:

Coupon Rate

The annual interest rate paid on a bond's face value to its holders, expressed as a percentage of the face value.

Duration

Measures the sensitivity of a bond's price to changes in interest rates, calculated as a weighted average of the times until the bond's cash flows are received.

Yield To Maturity

The total return anticipated on a bond if the bond is held until its maturity date, including all interest payments and the repayment of principal.

Coupon Rate

The interest rate that a bond issuer will pay to a bondholder, typically expressed as an annual percentage of the bond's face value.