Bond vs. Stock

Quantitative Finance Level 1

Which of the following is the difference between a bond and a stock?

Bond prices are fixed while stock prices are fluctuating. Bonds pay a stated par value on a stated maturity, while stocks do not guarantee returns. Bonds are owned by poor people while stocks are owned by rich people. Bonds are risk-free while stocks have risk.

3 solutions

Calvin Lin Staff
Feb 10, 2015

A bond will pay a fixed percentage in coupons, and a fixed principal amount on expiration (maturity).

Stocks do not guarantee a fixed amount (even those with dividends, could see a dividend increase or cut), nor is there a guaranteed amount that they are worth at some future point in time.

With regards to the other options:
Both stocks and bonds carry risk.
Their price is subject to change, and is dependent on market conditions.
They can be owned by anyone.

now that I see it written like that, it is all very logical. I made the mistake in thinking that bonds only carry less risk than stocks, but this doesn't necessarily mean that bonds carry no risk at all

Geert Stuer - 5 years, 8 months ago

It is true that in general, bonds carry lesser risk than stock, esp when comparing bonds and stock in the same company.

However, it need not be true that bonds in a failing company, would be less risky than stock in (say) Google.

Calvin Lin Staff - 5 years, 8 months ago

Bond will pay fixed amounts isn't it how can price of bond change depending on market conditions? thanks in advance

vijay katta - 5 years, 11 months ago

Check out Bond Prices and Bond Price Volatility

Calvin Lin Staff - 5 years, 11 months ago

Gagan Raj
Mar 9, 2015

In simple words !!!!!

$Bond$ is a form of a debt that the issuing entity promises to repay at some point of the time in future.

$Stock$ is a share in the ownership of a business.

Rob Moore
Dec 23, 2017

I'm not sure that it's entirely correct to imply that a bond guarantees return as the wording does. There is always a chance the the issuer defaults on their debt.

Bond vs. Stock

3 solutions

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