Understanding Bonds and Stocks

Running Head: Investing
INVESTING
Student Name
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Instructor’s Name
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Investing
a) What are bonds? What are their features and how are they traded?
A bond is a formal contract where the borrower is obliged to repay borrowed amount of money
with interests (coupon) at fixed intervals over a period of time. The interest rate maybe fixed or
floating. In this contract, the principal amount is repaid upon maturity.
Features of bonds
Face/par value- The face value in bond contract refers to the principal amount that the
bondholder will be paid or receive upon maturity. This value is the given amount rather than the
value of the bond.
Coupon- This refers to the interest that the bond yields. It is normally paid by the borrower at
fixed or floating rates over a fixed period of time. The yield is normally expressed in terms of
percentage and is determined by the prevailing factors such as prevailing interest rate, inflation
and probability of not being paid.
Maturity-This refers to the date when the principal amount of the bond becomes due and must be
repaid in full to the bondholders. It is normally influenced by the issuer. Maturity influences
yields in that the longer the maturity the higher the yields and vice-versa.
Issuer- This refers to the company or government that issues the bond. The issuer is the borrower
and is obliged to repay back the maturity in addition to periodical interest paid to bondholders.
How bonds are traded
The bond issuer issues bond to the broker who buys and resell them to investors. Investors who
then want to trade in bonds would then be required go through a broker, who acts as an agent of
the issuer. The bonds are issued at par value.

Investing
b) What are stocks? What are their features and how are they traded
Stocks are units of ownership in a company. Therefore when one buys a stock, he/she has an
ownership equivalent to the proportion of one’s stocks. Stocks do not have fixed returns.
However, shareholders are entitled to dividends whenever the company makes profit. They are
usually issued by companies in order to raise additional capital.
Features of stocks
They earn dividends whenever the company makes profit. Ordinary shareholders are paid
dividends after all company obligations have been settled such of repayment of debentures.
Ordinary shareholders have voting rights. They can vote in an annual general meeting on matters
concerning the company.
They are free transferable. Stocks can freely change ownership from one person to the other
unlike debentures.
The rate of dividends vary depending on the company’s performance. For instance, if the
company makes supernormal profits, higher rates of dividends will be paid unlike when the
company has underperformed.
In the event of winding up or liquidation, shareholders are paid last after all the other obligations
have been settled.
How stocks are traded
Stocks are traded through brokers who are members of stocks or securities exchange. The
prospective buyer registers with the broker upon which an account for him/her is opened. The
investor would use the account to buy and sell shares of different companies through the broker.