Advantages of Bonds over Stock
The interest on bonds can be deducted when calculating corporation tax. This translates to a lesser tax payable by the organization to the government. However, dividends which arise out of stock cannot be deducted hence they are taxable.
There is no dilution of the existing ownership in an organization when new bonds are issued since bondholders do not form part of the organization owners. They only receive the set interests. On the other hand, stock issuance adds new owners to the existing ones meaning that the original stockholders’ share of profits reduces.
Bonds have a defined lifespan meaning that the organization knows in advance the amount of money it will be charged in the future. Shareholders may decide to remain in the organization for a very long time or sell their shares to third parties.
Bonds can be issued with a callable attribute where they can be called before they mature.for shares, the organization is committed to paying dividends for a long time.
Disadvantages of Bonds
The interest on bonds has to be paid on time, failure to which the organization can be sued. Interest on stock does not have a fixed time limit
Bonds are usually costlier than stocks as their interest rates are higher than those of stocks.
A bond is a debt to an organization which is risky especially if the organization is highly leveraged. Shareholders are part of owners of the organ
Advantages and Disadvantages of Bonds.15th January 2016.Open textbooks for Hong Kong