Which statement accurately describes the difference between a bond and a stock?

Which statement accurately describes the difference between a bond and a stock?

• A. Bond is a loan to a business or government; stock is ownership with dividends and voting rights.
• B. Bond is an ownership stake with dividends; stock is a loan with interest payments.
• C. Bonds pay dividends; stocks pay interest.
• D. Bonds are a form of cash; stocks are physical commodities.

Answer: (C)

The key idea is debt versus equity. A bond is essentially a loan to a company or government. The issuer agrees to pay you interest on a regular schedule and to return the principal at the end of the term. A stock, on the other hand, represents ownership in a company. Shareholders may receive a portion of the company’s profits as dividends and may have voting rights, along with the potential for price appreciation. So the returns flow from bonds are interest payments, while the returns from stocks can come as dividends plus any increase in the stock’s price. The statement that bonds pay dividends and stocks pay interest flips that correct relationship, which is why it isn’t accurate. Keep in mind that, in practice, some stocks don’t pay dividends at all, and some bonds (like zero-coupon bonds) don’t pay periodic interest but still deliver return through price at maturity.

The key idea is debt versus equity. A bond is essentially a loan to a company or government. The issuer agrees to pay you interest on a regular schedule and to return the principal at the end of the term. A stock, on the other hand, represents ownership in a company. Shareholders may receive a portion of the company’s profits as dividends and may have voting rights, along with the potential for price appreciation.

So the returns flow from bonds are interest payments, while the returns from stocks can come as dividends plus any increase in the stock’s price. The statement that bonds pay dividends and stocks pay interest flips that correct relationship, which is why it isn’t accurate. Keep in mind that, in practice, some stocks don’t pay dividends at all, and some bonds (like zero-coupon bonds) don’t pay periodic interest but still deliver return through price at maturity.