How do stocks and bonds differ in terms of the future payments that they are expected...

How do stocks and bonds differ in terms of the future payments that they are expected to make? Which type of investment (stocks or bonds) is considered to be more risky? Given what you know, which investment (stocks or bonds) do you think commonly goes by the name “fixed income”?

Answer fully and justify your answers.

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Expert Solution

How do stocks and bonds differ in terms of the future payments that they are expected to make?

Stock- is simply an ownership interest in a company
Example: There is a company called 'X'. You can go into the stock market and buy 1% share stock of company 'X' and then you are the owner of that 1% share. Investing in individual stocks is great but it tends to be a little risky. Because stock prices fluctuate from day to day, so you can buy a stock today for 100$ and by tomorrow for some reason you may not even understand, the price may go down to 90$ or lower. So here the returns are uncertain.
Bonds- Bonds are safer than Stocks because Bonds are like I.O.U. You are lending company money and it's promising to pay you back with a certain interest. That promise is legally binding which makes bonds a lot safer than stocks. So here the returns are certain.

Which type of investment (stocks or bonds) is considered to be more risky?

Investing in stocks of a company is considered to be riskier because returns are uncertain as the stock prices are highly depended on the company's profit and loss.

Given what you know, which investment (stocks or bonds) do you think commonly goes by the name “fixed income”?

Bonds are like fixed income because it represents a loan made by an investor to a burrower with a fixed rate of return legally.

Rahul Sunny answered 1 year ago

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