PRACTICE QUESTION

Q. What is the key difference between a corporate bond and a stock?

1. Corporate bonds are riskier than stocks

2. Corporate bonds pay interest, while stocks pay dividends

3. Corporate bonds can be traded on stock exchanges, but stocks cannot

4. Corporate bonds have a fixed maturity date, while stocks do not have a maturity date

How many of the above statements is/are correct?

A) Only 1

B) Only 2

C) Only 3

D) All

Answer: B

Explanation:

 Statement 1 is incorrect: Generally, stocks are considered riskier than corporate bonds because bondholders have a higher claim on a company's assets in case of bankruptcy or liquidation.

Statement 2 is correct: Corporate bonds pay interest, while stocks pay dividends. Corporate bonds pay periodic interest to bondholders at a predetermined rate, while stocks pay dividends, which are a share of the company's profits distributed to shareholders. Unlike stocks, corporate bonds have a fixed maturity date, meaning they have a specific date when the principal amount is repaid.

Statement 3 is incorrect: Corporate bonds can be traded on stock exchanges, but stocks cannot: This statement is not correct. Both corporate bonds and stocks can be traded on stock exchanges.

 Statement 4 is correct: Corporate bonds have a specific maturity date when the issuer is obligated to repay the bondholders the face value of the bond. In contrast, stocks do not have a fixed maturity date as they represent ownership in the company and do not have a repayment obligation.