Finance Question with Comparison?

Question

Compare and contrast the nature and features of bonds and common stocks. Provide at least 6 points of comparison between the two types of securities.

Answer 1

1. Bonds are fixed income securities w/a fixed stream of payments pre-determined at issuance.  Common stock has no predictable cash flow patterns.  Dividends could be zero, up one year, down the next, etc etc.

2. in the case of the liquidation of the company, bondholders have a senior claim on the assets of the company over common stock holders

3.  bonds have fixed lives, whereas common stock is perpetual (although some debt is perpetual, but it is extremely rare)

4. If the company is public, the common stock is typically more liquid than most of the co's debt securities.  If the company is private, the common stock is usually extremely illiquid.

5. when interest rates go up, bond values go down.  this is not always the case with common stock.  it usually is, but not always, as is the case w/bonds

6.  investments in bonds are shown on the balance sheet at their carrying value, whereas stock investments are either shown using the equity method of accounting, or at cost, or at market.

7.  Bonds often are collateralized using specific assets of the company, whereas stock is 'collateralized' with whatever happens to be left over ifa company goes bankrupt and assets are sold and other liabilities paid off.

8.  Historical risk and return associated with common stock is substantially higher than bonds.