Chapter 6.2, Problem 3R

To determine

To analyze: The reason of stocks being riskier than bonds.

Explanation of Solution

Stocks and bonds are certificates issued to raise capital to establish a new business or to extend an existing company. Those who purchase stocks and bonds are called investors.

Stocks are more expensive than bonds, and if a company listed on the stock exchange needs to pay off its debt holders, the lenders would be paid off after the bondholders.

In addition, the issuer of the bond is guaranteed the par value at maturity and the repayment of the coupon (if any). Return to maturity can vary based on prevailing market interest rates, but yields do not fluctuate as much as stock prices. The shareholder can lose money if the stock is depreciated in value and the shareholder is not promised dividend payments.