Question

Why do entities borrow in the form of debt obligations? Economies around the world were still recovering during 2012 after the 2008-2009 recession. Governments and central banks continued their efforts to facilitate economic recovery. The U.S. Federal Reserve Bank (the Fed) kept interest rates at record lows. This, along with several other reasons, found the bond markets flooded with new bond issues. The following article highlights some reasons why firms issued debt obligations to raise funds. In the context of the reasons why entities borrow in the form of bond issues, which statement is correct? Check all that apply. Because of covenants, issuers often find direct borrowing from a bank more restrictive than selling debt on the bond market. Bond financing dilutes shareholder equity by reducing current shareholder ownership. This makes it difficult for companies to get approval to raise funds through bond financing. When spreads are narrow, borrowers want to lock in low coupon payments for the long term; investors, however, prefer short and medium terms, to avoid losing income when interest rates rise. When U.S Treasury yields are low and the spread between the Treasury and corporate bond yield is narrow, issuers can lock in low costs of borrowing through bond issues.

Answer 1

Answer:
1. Because of the covenants....the bond market.
4. When U.S treasury... through a bond issue.

3.When spreads are narrow, borrowers want to lock in low coupon payments for the long term; investors, however, prefer short and medium terms, to avoid losing income when interest rates rise.

Explanation:
The chief financial officer looks at the direct corporate loan as a last resort for debt financing due to its many terms and conditions, restrictions.
Covenants are restrictions for the bank's interest.

Due to the narrow spread between the US Treasury bonds and corporate bonds the company can issue for a low price. Hence benefiting from the low cost of debt financing.

Debt financing does not dilute the shareholder's equity.