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Chapter 21: Q. 16 (page 484)

Explain the basic differences between a share of stock and a bond.

Short Answer

Expert verified

Share of a stock is an official claim to share the corporation's future profit.

Bond is the official claim against the firm.

Step by step solution

01

Introduction

Stocks give you a stake in a company, whereas bonds are a debt to a company or government from you. The most significant distinction is in how they create profit: stocks must increase in value and then be sold on the stock market, whereas most bonds pay a fixed rate of interest over time.

02

Explanation 

A stock is an official claim to a portion of the company's future profits. The bond represents the firm's official claim. The bond's owner will receive a fixed annual payment plus a lumpsum payment at the bond's maturity date.

A stockholder receives a percentage of future profits, whereas a bondholder must receive a fixed amount regardless of whether the company makes a profit or not.

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Most popular questions from this chapter

You expect to receive a payment of $104one year from now.

a. Your rate of discount is 4percent. What is the present value of the payment to be received?

b. Suppose that your rate of discount rises to 5percent. What is the present value of the payment to be received?

If you were a government official, would you rather have to deal with many small businesses or a few large corporations?

Do you suppose that the degree of randomness in the stock prices indicated by the random walk theory has increased or decreased since early 2007? Explain your reasoning.

Suppose that one of your classmates informs you that he has developed a method of forecasting stock market returns based on past trends. With a monetary investment from you, he claims that the two of you could profit handsomely from this forecasting method. How should you respond to your classmate?

Classify the following items as either financial capital or physical capital.

a. A computer server owned by an information-processing company

b. $100,000set aside in an account to purchase a computer server

c. Funds raised through a bond offer to expand plant and equipment

d. A warehouse owned by a shipping company
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