Question

In what ways do bonds differ from stocks? Check all that apply.

(there are 4 correct answers)

a) In a bankruptcy, bond holder claims are prioritized while stock holder claims are not.   

b) Stock dividend payments are discretionary while bond coupon payments are not discretionary.

c) Bond holders are guaranteed their coupon payments and principal at maturity while stockholders are not guranteed any payments.

d) Bond holders don’t generally vote while stockholders generally do vote.

e) Bonds are not traded on exchanges while stocks are traded on exchanges.

Answer 1

In the following ways bonds do differ from stocks, all that applies:

a) in a bankruptcy, bonf holder claims are prioritized while stockholders claims are not because proceeds and assets are distributed to satisfy the claims. So bondholders and creditors paid first before the stock holders.

c) bond holders are guaranteed their coupan payments and principal at maturity while stockholders are not guaranteed any payments. Because being a bond holder is less riskier so bonds guaranteed their coupan payments and principal at maturity and also consistent interest payments whilr stockholders are not guaranteed any payments because they are perceived as more riskier than bond holders.

d) bond holders don't generally vote while stock holders generally vote. Unlike stockholders, bondholders do not vote or do not offer ownership participation in a company. So they do not generally vote. On the other hand stock holders offer ownership participation in a company through voting rights.

e) bonds are not traded on exchanges while stocks are traded on exchange. Unlike stockholders, for bondholders there is no central place or exchange for bond trading. So convertible bond have the option to traded on exchange. While stockholders are traded on exchange, stocks can trade on one or more of several exchanges.

The following is not applied:

b) stock dividend payments are discretionary while bond coupan payments are not discretionary is not correct. Because bond coupan payments are discretionary, unlike fixed deposits, ABA bonds will offer coupon payments every six months which gives the investors an opportunity to resell on the stock market. While stock dividend payments are discretionary because most stock is considered common stock and dividends are issued at the discretion of the issuing entity.