Understanding Bonds and Stocks: A Financial Perspective

866 Words2 Pages

Assignment#1

Sijia Duan 5264643 ECON3P03

Bond is a kind of financial contract, which is issued by the government, financial institutions, industrial and commercial enterprises directly to the society to borrow money, issued to the investors, at the same time promised to pay interest at a certain rate and repay the principal according to the agreed conditions. On the other side, a stock is a security issued by a stock company for the purpose of raising funds …show more content…

Bond and stock both belong to negotiable securities, although both have their own characteristics. Bond and stock as a member of the securities system, which is a fictitious capital, they are no actual value, but they are the representatives of the real capital. Holding bond and stock are likely to obtain revenues. Also, bond and stock are the means of financing, compared with indirect financing such as bank loans, issuance of bonds and stock financing are large, long-term, low-cost, and not subject to the conditions of the lending bank. But, the mutual effect of yield from a single bond and stock, their yields are often differences and sometimes there such a big gap. However, if the market is effective, the average interest rate of the bond and the average return rate of the stock will generally remain relatively stable relationship, the difference reflects the degree of risk difference between the two. Looking with dynamic, the rate of return of the stock and prices and bond’s interest rates and prices are affect each other, often in the securities market with the movement in the same direction, for example, when the stock goes up then the bond will be going up too, but not exactly same range. These are the relationship between stock and …show more content…

First, issuing body is different, as a means of financing, whether the country, local public group and enterprises can issue bonds but stock can only be issued by a joint-equity enterprises. Second, the stability of earning is different. From the proceeds, the bond’s interest rate are fixed before the purchase, and the fixed interest rate can be obtained at maturity regardless of whether the company issuing the bonds is profitable or not. On the other hand, stock won’t have a fixed dividend yield before the purchase, the dividend income follow with the profitability of the stock company to changes. Third, bond can take back the principal at maturity, also people can get both the principal and interest in the maturity date. But, stock has no expiration date, once the principal of the stock is giving to the company, it can not be recovered. And also, the risk is different. Bond is only the general investment object, the turnover rate of the transaction is lower than the stock, however, the stock is not only an investment object, it is the main investment object in the financial market, the turnover rate of transaction is high even it has low security and high risk, but will obtained a high expected income, which also attracting a lot of

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