Future Business Leaders of America (FBLA) Personal Finance Practice Test

Why do corporations typically sell corporate bonds?

1. To reduce debt

2. To increase prices of stocks

3. To raise money when selling stock is difficult

4. To enhance liquidity

The correct answer is: To raise money when selling stock is difficult

Corporations sell corporate bonds primarily to raise capital, especially when conditions for selling stock may not be favorable. Bonds allow companies to borrow money from investors, providing them with immediate funds that can be used for various purposes such as expanding operations, refinancing existing debt, or funding new projects. Selling bonds can be more attractive than issuing new stock in times of market instability or when investor sentiment is low, as it helps maintain control and avoid diluting ownership for existing shareholders. The choice regarding enhancing liquidity focuses on cash flow management, which may not always be the driving reason for issuing bonds. While creating liquidity is a benefit of selling bonds, the fundamental reason remains the need for funding. Options related to reducing debt or increasing stock prices do not accurately reflect the primary rationale behind the decision to issue corporate bonds.