b. Who benefits from the fine print when the bonds are issued? Suppose the firm is offered the choice of issuing (1) a bond with standard restrictions on dividend payout, additional borrowing, and so on, and (2) a bond with minimal restrictions but a much higher interest rate? Suppose the interest rates on both (1) and (2) are fair from the viewpoint of lenders.

Which bond would you expect the firm to issue? Why?

516 Part Five Payout Policy and Capital Structure