Nowadays, companies prefer to issue bonds so they can financed . Most companies can also borrow from banks, but direct borrowing from a bank is more restrictive and expensive than selling debt on the open market through a bond issue.
The costs involved in borrowing money directly from a bank are prohibitive to a number of companies. In the world of corporate finance, many chief financial officers think that borrowing from a bank as the last option because of the restrictive debt covenants that banks place on direct corporate loans. Covenants are rules placed on debt that are designed to stabilize corporate performance and reduce the risk to which a bank is exposed when it gives a large loan to a company. In other words, restrictive covenants protect the bank's interests. They're written by security lawyers and are based on what analysts have determined to be risks to that company's performance. Covenants are a way for banks to try lessen the risk of holding debt, but for borrowing companies they are seen as an increased risk.
Simply put, banks place greater restrictions on what a company can do with a loan and are more concerned about debt repayment than bondholders. Bond markets tend to be more forgiving than banks and are often seen as being easier to deal with. As a result, companies are more likely to finance their operations by issuing bonds than by borrowing from a bank.
But also bonds acquire some risks that have to be taken. Firstly, because bonds are a debt, the issuer has payment obligations that are enforceable under law. Even if the issuer has financial difficulties, coupons and principal payments must still be made. Secondly, when bonds mature the issuer still needs capital, it may have to refinance. So he must pay off the bonds and find new capital to replace the funds paid out. However, refinancing could be a problem if interest rates have been...
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