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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

Reconsider Figure 21-1 and the data provided in Problem 21-19, and suppose that P2=$2,800 per acre. By how much do economic rents change when the rental rate on land rises from P1toP2 in the figure?

In Problem 21-6, that you have now operated your consulting firm for a year. At the end of the first year, your total revenues are $77,250. Based on the information in Problem , what is the accounting profit, and what is your economic profit?

Identify the main sources of corporate funds and differentiate between stocks and bonds.

Consider Figure 21-2. Explain why the figure indicates that if the normal rate of return on investment were to remain unchanged while accounting profit increased, economic profit also would increase.

Why might state-owned companies that China's government ordered to buy more shares to help boost returns have been equally likely to have later earned either higher or lower returns? Explain your reasoning.
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