Question

Explain the differences between stocks and bonds. Be sure to include how stocks and bonds are carried on the books of the issuer and then of the buyer.

Answer 1

Stock represents part ownership of a company while bonds represent debt. Stock is shown as owners capital and equity in the books of the company. Bond is shown as outsiders liability in the books of a company. Bonds carry a fixed interest rate which is the burden on the profits of the business. This interest is tax deductible and results in cost of finance for the business. Stocks on the other hand offer return in the form of dividend which is at the discretion of the directors of the company. There is no fixed rate of return and dividends are not tax deductible resulting in higher cost of finance for the business.

From the point of view of the investor bonds represent low risk investment in his portfolio while stocks represent high risk investment.