Week 2 post 2 review minimum of 150 words apa format
1.) Bonds are considered long term loans that companies can get in order to obtain inventory or equipment now. The company can get the money up front and just make interest payments until the maturity date. This event can be years out in advance.
2.) The key difference between stocks and bonds is equity. The bond is just a glorified loan with a low interest rate. Selling stock is selling a piece of the company for upfront costs. It’s kind of like watching Shark Tank (ABC). The inventors are asking for 50,000 for a 15% stake in the company. They might get the money upfront, but now they only own 85% of the company. If they went and got bonds, then they would be only be making interest payments on the low interest date, until the maturity date.
1.) ” The two primary factors in determining the degree of volatility or price sensitivity of a bond investment are the coupon rate and the time to maturity.” (Thorp, W., 2012) The coupon rate is essentially the interest rate that is paid on a yearly basis. The maturity is the date the loan principle balance is due. The further out that the maturity date is, the more prone to changes in the rate.
2.) The main differences between bonds and stocks are that bonds have to be paid back. Bonds are just long term loans. Businesses must pay back interest payments each year until maturity. Also bonds are considered the “senior” lending, meaning that it is the first debt to be paid back. Stocks on the other hand, are the last to be paid out. However, interest payments are not made, because ownership of the company is given in exchange for the money.
Thorp, W. (2012). Determining Bond Price Volatility. Computerized Investing. Retrieved from http://www.aaii.com/computerizedinvesting/article/determining-bond-price-volatility