What effect does a bond issue have on Return on Equity (ROE)?

When considering the effect of a bond issue on Return on Equity (ROE), it is important to understand the components that make up ROE. ROE is calculated by dividing net income by shareholder equity.

Issuing bonds raises debt rather than equity, which means that, while the overall capital structure of the company changes, the equity section of the balance sheet does not change immediately because bonds are a liability. Therefore, the immediate effect of issuing bonds on shareholder equity is negligible.

However, the money raised from issuing bonds can be used to generate profits, and if successful, this increase in net income may eventually enhance ROE over time. However, at the moment the bonds are issued, equity remains constant, so the direct impact on ROE at that specific time is effectively none.

This reasoning establishes that the bond issue does not directly alter the equity on the balance sheet; thus, the immediate effect on ROE is not present, leading to the conclusion that the bond issuance has no direct effect at the moment. Over time, depending on how the funds from the bond are utilized, there could be changes to ROE, but those effects are not immediate nor guaranteed. Hence, the choice that states it has no effect on ROE at the