Historically, big-firm stocks are riskier than bonds, True/False? Explain briefly.

Expert Solution

Answer:-

The statement is True with reference to investors perspective.

The big firm stocks are relatively riskier as they are not obliged to pay any fixed amount of interest payments to the investors unlike bonds though in some cases the company may pay a dividend which is at the discretion of management.

The value invested by the company generated from the profits shows the investors confidence in the company's future.

The bonds have certain covenants which will restrict the company to spend money in non profitable ventures and limit the debt that can be raised by the company.

The bonds pay regular dividends which increases the investors return. The volatility of stocks are very high where as the bond have low volatility and in case of stocks any adverse news with respect to the company or industry can effect the stock price to greater extend even leading to complete bankruptcy in case of closure of company. The bonds on the other hand can recover some amount from the companies assets which have more priority than the equity holders.

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