Canadian Securities Course (CSC) Level 1 Practice Exam

What are the advantages and disadvantages of issuing debentures?

1. Lower cost, regular interest payments

2. Higher coupon rate, higher flexibility

3. Equity status, no dividend obligations

4. Less regulation, higher repayment demands

The correct answer is: Lower cost, regular interest payments

The correct answer is A. Issuing debentures can provide the advantage of lower cost compared to other forms of financing, such as equity. This is because debentures typically have lower interest rates than dividends paid to equity shareholders. Additionally, regular interest payments are a benefit of debentures as they provide a predictable cash outflow for the issuer. Option B is incorrect because debentures usually offer lower coupon rates compared to other fixed-income securities like bonds. Higher flexibility is not typically a characteristic associated with debentures. Option C is incorrect as debentures do not carry equity status; they are considered debt instruments with a specific repayment obligation. Furthermore, debentures do not exempt the issuer from making interest payments, unlike equity, which does not have a mandatory dividend payment. Option D is incorrect because debentures are subject to regulations, just like any other financial instrument. In terms of repayment demands, debentures have a fixed repayment schedule at maturity, which is predetermined and not subject to higher demands relative to other forms of debt. In summary, the advantages of issuing debentures include lower cost and regular interest payments, making option A the correct choice.