Differences between stocks and bonds?

Question

Do bondholders have voting rights, is bond interest tax-deductible, is a payment of a bond interest is not required, and are there financial leverage on bonds?

Answer 1

A stock is ownership in a company, although each share might be a very small part of the total ownership. As a partial owner, you have voting rights.

A bond is just a loan of money to a company. Bond interest paid is tax deductible to the company paying it.

Answer 2

The number one difference is that a stock represents a share of ownership in the company by the stockholder (equity) and a bond represents a loan to the company by the bondholder (debt). Bondholders do not have any voting rights because they are creditors of the company, not owners. In general, interest on bonds, other than certain government bonds, are taxable. There are bonds that do not require regular interest payments but all bonds involve some repayment of principal and interest whether all at once or as a regular "coupon" payment. As for financial leverage, I am not sure what you mean, but bonds are a form of leverage for the company that issues them because they are in effect borrowing against their future earnings.

Answer 3

Stocks are called Capital Investments. You are giving your money to the Company for their use, and therefore you are entitled to voting rights, as you now own a portion of said company (an equity position).
Bonds are called Debt Investments, as the same Company is borrowing this money from you. They pay you interest, and at a predetermined time, return your money to you. Bond holders do NOT have voting rights in any way, shape or form. You do not own anything in that company. The only comfort here is, should that company go belly up, you get first dibs on getting your Principal back (after taxes, wages and property bonds have been paid first) over that of preferred and then common stock. The Interest on the bond is not tax-deductible...it is taxed at whatever you income bracket is as this is considered Income (regardless of how long you have held the bond!). Conversely, stocks gains are called capital gains and whenever you sell the stock you owe only on that portion you gained, not the whole amount. If you held the investment for longer than 365 days, you only pay 15% Capital Gains tax...regardless of your Income Tax Bracket. If you held it for less than 365 days, you owe 35% capital gains tax.
Unlike Dividends (which can sorta be considered an interest payment on Stocks held, as they are taxed the same as the interest on the bond), Interest on a Bond IS OWED. It is an obligation on the part of the Company to pay you. If they don't then they are in a real financial hurt locker and cannot do anything to anyone else until they pay that interest payment. As for financial leverages on bonds, it depends on the Bond...as there are many types. If it is an equipment bond, than the bondholders can liquidate the equipment that was placed in trust over the bonds to the amount of the back interest payments. Equipment bonds are common for Airliner Companies, with the planes placed in trust over the Bonds. The same is true for Mortgage Bonds (not the ones we hear about in the News regarding the subprime mess...those are Collaterialized Mortgage Obligations, and are not quite the same here), as the trust on these bonds is some physical property, like a factory. There are also bonds issued by one company that are backed by another (usually the Parent Company)...so AT&T could back the bonds issued by Cingular in order to reduce the interest rate and increase the Bond's credit rating through Moody's or Standard and Poor. However, in cases like these, there is nothing but the company's good name backing them...so, its generally buyer beware...and they usually have a higher interest rate than bonds supported by equipement or mortgages. This is where 'junk bonds' come into play. As these bonds are from companies that are not backed with anything but the companies name and they are of a poor credit rating...to compensate, they offer a higher interest rate.

Answer 4

You're naming a few terms that are kind of used interchangeably in business. Common Stock or Common Shares are essentially the same thing. They represent ownership and a claim in the residual assets of a company. Bonds are debt, they do NOT have any ownership in the company, and are technically a LOAN. Bonds get priority on the claim of assets before shareholders do. That's just how it is. Bond's can be issued by companies for an interest rate and principal back at a future date. Security is essentially a financial asset that can be traded. Does not have to be common shares, it can be an ETF, or a mutual fund, or a stock. Essentially securitization is taking assets and turning them into a "security" and selling units to investors. Hopefully that clears up the difference

Answer 5

As a bond holder, you have loaned that company your money for a specified interest rate, for a specified time period.
As a stockholder, you purchase a direct interest in the company, be it good or not so good.