Question

Contrast the differences/similarities of common stocks and bonds. Explain how they would be used in the corporate environment.

Answer 1

The main similarities between bonds and Common stock is that both are major form of investments which is being used by investors for the parking their money. They both are tradable securities in the market.

The primary difference between common stock and bonds is that bonds are the debt obligation for a firm while common stocks are the ownership of a company. There are certain rights which are enjoyed by common stock holders which are not enjoyed by bondholders. The main differences between the two can be discussed as follows:

Basis	Bonds	Stocks
Priority of repayment	In case of liquidation, bondholders are given priority as they are the debt holders of the firm. This would entail that bonds are safer investments that common stocks.	Common stocks and stock holders have the last claim on the assets of the firm in case of liquidation. This means that stocks are riskier than bonds.
Periodic payments	The payment of interest is mandatory for company, it can not skip interest payment to its bondholders.	A company may or may not give dividends to its shareholders, it is completely company's discretion.
Voting rights	Bond holders does not carry any voting rights.	Common stock holders are the owners of company and therefore do carry voting rights.

Corporate can use bonds and common stocks for the purpose of raising necessary capital for the growth and development of business. Each source comes up with a cost. The cost of debt is the interest that company will have to pay, while the cost of common stock will be the rate of dividend paid by the company. Company can use bonds, if it wants to raise capital but without diluting its share ownership. It can be raised through issue of bonds in the market with a specified maturity date. Common stocks are usually issued by the company when it wants to go public in the form of IPO. The company can use common stock issuance as a measure to raise capital with low cost of dividend in the longer run.