Question

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.
a) When investors look for instruments that help generate income and have lower risk levels-as compared to equity offerings_they are eager to invest in debt obligations.
b) Bond coupon payments are borrowing cost for issuers.When interest rates are low,borrowing cost is law,thus more conductive for issurers to lock in low cost.
c) When equity markets are turbulent and investors prefer relatively safer fixed-income securities, bond markets become a safe place to invest. This leads to increased demand, thus encouraging corporations to supply fixed-income securities.
d) Investors looking for tax-exempt income are likely to invest in companies that pay high dividends.

Answer 1

Answer: A, B & C

Explanation:

Bonds generate a stable and constant cashflow for the holders and are not as risky as stock because bond holders at the very least are some of the people who will get priority in any monies raised if the company goes into liquidation. Bonds are debt so their interest are paid first from company revenue regardless of if profits were made or not further reinforcing that they are better than stock in terms of risk.

As mentioned in the text, bonds had flooded the market due to the low interest rates that the Fed kept. This is indeed because in a low interest rate environment, companies can offer bonds at lower coupon rates which reduces their cost of borrowing.

When the stock market is turbulent, the Fixed Income(bonds) market are a known safe haven that investors flee to because here they can earn stable incomes with less risk and because of the increase in demand, companies offer bonds and at lower rates too due to the Law of Supply.