From: ask@cbnews.cb.att.com (Arthur S. Kamlet)
Subject: Re: What are BONDS ?
Organization: AT&T Bell Laboratories,  Columbus, Ohio
Date: Wed, 6 Jan 1993 15:33:38 GMT

In article <1993Jan6.150829.4385@ucsvc.ucs.unimelb.edu.au> u5557908@ucsvc.ucs.unimelb.edu.au writes:
>This may sound like a very basic question, but can someone explain to me the
>difference between and bonds and common stocks. Are ther different kinds of
>bonds?


Common stock represents shares of ownership in the company.

Let's say I'm a private company, and I wish to incorporate.
I will do lots of paperwork, and one of the things I will do is
issue shares of stock in the new corporation.  The bylaws or similar
document governing the corporation will usually specify how many
shares the coproration is permitted to issue, and the procedures for
increasing this number.

The coporation will probably then sell shares of this stock to
people who wish to buy the stock, and at price agreeable to all
parties.

The shareholders, collectively, now own the corporation.

The shareholders usually get to vote on certain issues, such as who
will be elected to direct the corporation.   These directors
represent the shareholders.   They might decide to have the
corporation declare and pay dividends to stockholders.

(There are other classes of stock besides common stock, but I think
that may confuse things at this point.)


The price of the stock is whatever buyers and sellers agree to.

In the event the corporation goes out of business and liquidates,
the stockholders have about the lowest priority in terms of
recovering anything.   After the creditors have been paid off and
the bondholders have been paid off, and if there are preferred
shareholders, after they have been paid their dividends, if any,
then any value left in the corporation would be distributed to
common shareholders.   That's probably nothing at all.



Bonds are debt instruments.   Let's say a corporation needs to build
a new office building, or needs to purchase manufacturing equipment,
or needs to purchase aircraft, they will have to raise money.

One way is to arrange for banks or others to lend them money. But a
generally less expensive way is to issue (sell) bonds.  The
corporation will agree to pay dividends on these bonds and at some
time in the future to redeem these bonds.

In the U.S., corporate bonds are often issued in units of $1,000.
(When municipalities issue bonds they are usually in units of
$5,000)   Dividends are usually paid every 6 months.

Bondholders are not owners of the corporation.  But if the corporation
gets in financial trouble and needs to dissolve, bondholders must be
paid off in full before stockholders get anything.

If the corporation defaults on any bond payment, any bondholder can
go into bankruptcy court and request the corporation be placed in
bankruptcy.

The price of a bond is a function of prevailing interest rates (as
rates go up, the price of the bond goes down, and vice versa) as
well as the risk perceived for the debt of the particular
corporation.  For example, if the company is in bankruptcy, the
price of the bond will be low.

There are other financial instruments, some of which combine
features of bonds and stock.
-- 
Art Kamlet  a_s_kamlet@att.com  AT&T Bell Laboratories, Columbus