A major disadvantage resulting from the use of bonds is that: A. earnings per share may be lowered. B. bondholders have voting rights. C. interest must be paid on a periodic basis. D. taxes may increase. | Homework.Study.com (2024)

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A major disadvantage resulting from the use of bonds is that: A. earnings per share may be lowered. B. bondholders have voting rights. C. interest must be paid on a periodic basis. D. taxes may increase. | Homework.Study.com? ›

Answer and Explanation:

Bondholders risk a significant price drop if a large number of bonds are sold at once. They have less legal protection than stocks. They are more likely than stocks to end up valueless if a company goes bankrupt.

Credit risk is a disadvantage of corporate bonds. If the issuer goes out of business, the investor may never get the promised interest payments or even get their principal back.

Some of the disadvantages of bonds include interest rate fluctuations, market volatility, lower returns, and change in the issuer's financial stability. The price of bonds is inversely proportional to the interest rate.

Bonds do have some disadvantages: they are debt and can hurt a highly leveraged company, the corporation must pay the interest and principal when they are due, and the bondholders have a preference over shareholders upon liquidation.

Liability Another disadvantage of bond issuance is the obligation of the issuer to pay the investor the interest regardless of the company's financial status. In stocks, the company is not liable to the investors if the stocks are down, unlike in bonds, where the issuer has to pay the investor.

Which of the following is an advantage of bonds for a potential investor? They provide a more consistent and reliable income stream than stocks.