How do corporate and government bonds differ from common and preferred stock?
Solution
Stocks, or shares of stock, represent an ownership interest in a corporation. Bonds are a form of long-term debt in which the issuing corporation promises to pay the principal amount at a specific date.
Stocks pay dividends to the owners, but only if the corporation declares a dividend. Dividends are a distribution of a corporation\'s profits. Bonds pay interest to the bondholders. Generally, the bond contract requires that a fixed interest payment be made every six months. Following main points of differenciation are worth noting-
1. Ownership:
Shares are known as Owned Funds.
Whereas bonds are Loaned Funds.
2. Maturity:
Shares have perpetual life.
Bonds mature after certain time period.
3. Periodic Payments:
Shares do not promise periodic payment (dividends)
Bonds have to pay the periodic payments (coupon)
4. Rights during liquidation:
Bondholders are paid their amount first during the liquidation of the company.
Shareholders are the last to get paid.
5. Ratings:
Bonds are rated by Rating Agencies to provide a measure for creditworthiness.
Shares do not have ratings. They have trust and expectations.
6. Representation:
Shares are equity and represent ownership in a company.
While bondholders have no stake in the company except that they are entitled to interest from the company.
7. Right to vote:
Shares entitles the shareholders with voting rights for the management decisions in the company.
Bondholders do not posses any such rights.
8. Risk:
Return from bonds are low but risk-free, i.e. guaranteed return (coupons)
Returns from shares although very high, but extremely volatile.
9. Holders
Bond holders are in essence lenders to the issuer.
The stock holders own a part of the issuing company (have an equity stake).
.
How do corporate and government bonds differ from common and preferred.docx
1. How do corporate and government bonds differ from common and preferred stock?
Solution
Stocks, or shares of stock, represent an ownership interest in a corporation. Bonds are a form of
long-term debt in which the issuing corporation promises to pay the principal amount at a
specific date.
Stocks pay dividends to the owners, but only if the corporation declares a dividend. Dividends
are a distribution of a corporation's profits. Bonds pay interest to the bondholders. Generally, the
bond contract requires that a fixed interest payment be made every six months. Following main
points of differenciation are worth noting-
1. Ownership:
Shares are known as Owned Funds.
Whereas bonds are Loaned Funds.
2. Maturity:
Shares have perpetual life.
Bonds mature after certain time period.
3. Periodic Payments:
Shares do not promise periodic payment (dividends)
Bonds have to pay the periodic payments (coupon)
4. Rights during liquidation:
Bondholders are paid their amount first during the liquidation of the company.
Shareholders are the last to get paid.
5. Ratings:
Bonds are rated by Rating Agencies to provide a measure for creditworthiness.
Shares do not have ratings. They have trust and expectations.
6. Representation:
Shares are equity and represent ownership in a company.
2. While bondholders have no stake in the company except that they are entitled to interest from the
company.
7. Right to vote:
Shares entitles the shareholders with voting rights for the management decisions in the company.
Bondholders do not posses any such rights.
8. Risk:
Return from bonds are low but risk-free, i.e. guaranteed return (coupons)
Returns from shares although very high, but extremely volatile.
9. Holders
Bond holders are in essence lenders to the issuer.
The stock holders own a part of the issuing company (have an equity stake).
