Homework Question on Bond and Stock
- How does a bond differ from a stock?
Homework Answer on Bond and Stock
Investors are normally advised to diversify their investment funds in form of bonds and stocks. Bonds and stocks symbolize two different methods that corporate businesses can raise money to expand their operations. A bond is merely a debt to the firm. When a firm gives out a bond, it is offering a debt, and has to agree on paying interest for using the investors’ money. A stock, or a share, is an ownership venture of a company. Once an entity has established itself and is planning for expansion, it can turn to stocks in the financial market to add its capital.
Public entities and credit institutions normally issue bonds while joint-stock companies and large corporations issue stocks. Large profitable multinationals possess strong balance sheets in addition to excellent dividend records hence attracting investors to buy their stocks. However, bonds remain the right option for most of pension schemes, since they have the capacity to mitigate some of the mark-to-market risk that pension schemes encounter (McClintock, 2011).
Bonds require the issuing firm to pay interest for every six months while stocks will earn investors dividends only when the firm declares a dividend. In general, stocks pose more risk and volatility than bonds, although they create high returns when compared to bonds. According to Francisco (2012), bonds are preferred to stocks in the legal pecking order, as a firm is “obligated by law to pay its bondholders before it pays anyone else” in case of financial breakdown (p. 49).