Part 1Which of the following are differences between a bond and a common stock? (Select all that apply.) A. A corporation has to pay all stockholders before paying bondholders. B. A bond is a debt instrument that entitles the owner to receive periodic amounts of money until its maturity date, whereas a common stock represents a share of ownership of the institution that has issued the stock. C. A bond is a claim on the earnings and assets of a corporation, whereas a common stock promises to make periodic payments for a specified period of time. D. A corporation has to pay all bondholders before paying stockholders.

Question

Part 1Which of the following are differences between a bond and a common​ stock? ​(Select all that​ apply.) A. A corporation has to pay all stockholders before paying bondholders. B. A bond is a debt instrument that entitles the owner to receive periodic amounts of money until its maturity​ date, whereas a common stock represents a share of ownership of the institution that has issued the stock. C. A bond is a claim on the earnings and assets of a​ corporation, whereas a common stock promises to make periodic payments for a specified period of time. D. A corporation has to pay all bondholders before paying stockholders.

BlackTom AI · Accepted Answer

Restating the question and options to ensure clarity: the task asks us to identify differences between a bond and a common stock and to select all that apply. The options present four statements labeled A to D.

Option A: 'A corporation has to pay all stockholders before paying bondholders.' This is incorrect. In typical corporate capital structure, bondholders have a higher priority claim on assets and income than stockholders. Stockholders are residual claimants, meaning they are paid after debt obligations and other senior claims are satisfied. Saying stockholders are paid before bondholders reverses the actual hierarchy, making this statement false.

Option B: 'A bond is a debt instrument that entitles the owner to receive periodic amounts of money until its maturity date, whereas a common stock represents a share of ownership of the institution that has issued the stock.' This is true and captures a fundamental difference: bonds are creditor relationships with fixed or periodic payments until maturity, while common stocks confer ownership stakes in the issuing company and typically do not guarantee periodic payments.

Option C: 'A bond is a claim on the earnings and assets of a corporation, whereas a common stock promises to make periodic payments for a specified period of time.' This statement mixes concepts inaccurately. A bond is primarily a claim on assets and earnings only in the sense of debt repayment; however, it does not guarantee periodic payments for a 'specified period of time' in the way this option suggests, and it mischaracterizes common stock as promising fixed periodic payments (dividends are not guaranteed and not for a specified period). Therefore, this option is misleading and incorrect.

Option D: 'A corporation has to pay all bondholders before paying stockholders.' This statement is aligned with the standard priority of claims: bondholders (creditors) have a higher priority than equity holders, so bond payments and liquidation proceeds are made before anything is paid to stockholders. This makes the statement true.

Summary of reasoning differences: Option A is false due to inverted payment priority; Option B accurately differentiates debt versus equity ownership and payment structure; Option C inaccurately mixes claims of guaranteed payments for bonds and implied guaranteed dividends for stock; Option D correctly reflects the seniority of debt holders in payment hierarchy. The correct distinctions are captured in B and D, while A and C contain misconceptions or inaccuracies about payment order or guarantees.

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