Indicate the differences between a bond and a stock. Why is a bond typically (yes, there...

Indicate the differences between a bond and a stock. Why is a bond typically (yes, there numerous counter examples to this) considered to be a lower risk investment? Explain.

Expert Solution

Stock or shares represent ownership interest in a publicly owned corporation.
Common stock or shares do not have maturity dates.
Stocks pay dividends only when the board of directors declare a dividend. Dividends
are distribution of a company's profits among its shareholders.
Dividend payments are not tax deductible for corporations or companies.
Stocks are usually traded on an exchange.

Bonds are a type of long-term debt in which the issuing company promises to
pay the principal amount on a specified maturity date.
Bonds usually make fixed interest payments every six months to the bondholders
until the bonds mature. The interest paid by the issuing company is tax deductible when the issuing companies
file for a tax return.
Bonds are traded in an over the counter market.

Bonds are typically lower risk investments compared to stocks because
bonds have more certain cash flows, since they are required to pay the principal on maturity.
Moreover, bonds are required to make fixed interest payments in the interim period.
In addition, bonds have a fixed maturity date.
In the case of bankruptcy, bondholders have a right on the assets of a company ahead
of the stock owners.

Rahul Sunny answered 1 year ago

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