Question

How can a company use bonds in its capital budgeting decisions?

Answer 1

A corporate bond is a bond issued by a corporation to raise money effectively so as to expand its business. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date.

Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. Other bonds, known as convertible bonds, allow investors to convert the bond into equity.

Therefore, company can use bonds in its capital budgeting decisions which can entail the lowest financial risk and, therefore, generally have the lowest interest rate.