Canadian Securities Course (CSC) Level 1 Practice Exam

What are the advantages and disadvantages of issuing bonds?

1. Direct shareholder control, pricing flexibility

2. Lower interest rates, less flexibility

3. Higher costs, problematic mergers

4. Unlimited lifespan, asset tie requirement

The correct answer is: Lower interest rates, less flexibility

The correct choice highlights some important aspects associated with issuing bonds. Issuing bonds can often result in lower interest rates compared to other forms of financing, such as bank loans or issuing equity, particularly in a favorable economic environment. This feature makes bonds an appealing option for companies seeking to manage borrowing costs effectively. However, this choice also points out the less flexibility aspect. Once a company issues bonds, it commits to making regular interest payments until the bonds mature, along with repaying the principal. This structured payment plan can limit the company's financial flexibility, especially in times of economic downturns or if the company needs to reinvest earnings back into operations rather than fulfill debt obligations. In summary, the correct choice emphasizes that while bonds can facilitate lower borrowing costs, they also impose certain rigidity on a company's cash flow management.