What happens when a firm issues bonds?

When a firm issues bonds, it takes on a debt obligation. This occurs because bonds are essentially loans made by investors to the firm; by issuing bonds, the firm borrows money that it agrees to pay back at a later date, usually with interest. This transaction increases the firm's liabilities on its balance sheet, reflecting the obligation to repay the borrowed funds.

The issuing of bonds does not involve selling assets; instead, it allows the firm to raise funds for growth, operations, or other investment opportunities without immediately needing to liquidate any of its existing assets. Additionally, bonds do not reduce equity in the firm because they do not involve issuing shares of stock; they instead represent a promise to repay a debt. Finally, while firms can raise capital through equity issuances (like selling shares), they have the option to raise capital through debt, like bonds, which is a different method of financing.