What is the advantage of issuing bonds instead of stock?
There are several advantages of issuing bonds or other debt instead of stock when acquiring assets. One advantage is that the interest on bonds and other debt is deductible on the corporation's income tax return. Dividends on stock are not deductible on the income tax return.
A second advantage of financing assets with bonds instead of stock is that the ownership interest in the corporation will not be diluted by adding more owners. Bondholders and other lenders are not owners of the assets or of the corporation. Therefore, all of the gain in the value of the assets belongs to the stockholders. The bondholders will receive only the agreed upon interest. This is related to the concept of leverage or trading on equity. By issuing debt, the corporation gets to control a large asset by using other people's money instead of its own. If the asset ends up being very profitable, all of its earnings minus the interest, will enhance the owners' financial position.
