mature, and reinvest the money if possible. Corporate Bonds Just as government bonds are loans to federal, provincial, and local governments, corporate bonds are loans to corporations. Most corporate bonds are sold in $1000 denominations, and pay a fixed rate of interest each year. Their maturity dates can vary widely, some maturing a few years from the date of purchase, some 25 years later. You cannot redeem corporate bonds until the specified maturity date, but you can sell your bonds to other investors if you need the cash sooner. You can sell any bonds with interest rates higher than market rates at a premium (higher than face value) because they are in demand. You will have to sell bonds with lower than market rates at a discount (lower than face value) as investors can do better elsewhere, and need a bargain to make the bond attractive. Corporate bonds are more risky than government bonds, but in the vast majority of cases provide a higher yield. The average bond yield for 2007 was close to 5%.
Lesson 17, page 20 Introduction to Business BBI2O-B Copyright © 2008 The Ontario Educational Communications Authority. All rights reserved. Stock Corporations that need capital for start-up, expansion, new technologies, or any other major project can borrow money from investors (corporate bonds) or sell pieces of the company in the form of stock. There are two reasons for investors to invest in stocks: dividends and growth. Dividends are the stockholders’ share of the company’s profits. Stockholders meet annually to vote on the division of any profits, and set the dividend rate for common shares. If there were no profits, the stockholders can still decide to pay a dividend if they wish, but will often decide not to pay one for that year. The stockholders (also known as shareholders) may decide not to pay a dividend on common shares even if the company made a profit, as the earnings of the company might be needed to pay down debt or to expand the facilities. There are two main types of stock you can buy: preferred and common. Preferred stocks are more akin in their features to corporate bonds than to common stock in a corporation. They offer a fixed dividend rate, show only moderate growth, and provide slightly more security, as preferred shareholders get to divide corporate assets before common shareholders do if the corporation goes bankrupt. Generally, preferred shareholders cannot vote at the annual general meetings and therefore do not have a major ownership position. Common stocks, on the other hand, are voting shares on which a dividend may or may not be given. Each shareholder has one vote for every share owned. The shareholders meet at the annual shareholders’ meeting to vote on matters that affect them (shareholders are not required to attend the meeting, but can if they wish, or they can send their vote on important issues to the board on a form called a proxy). If the majority of the shareholders vote that the company’s profits should go to pay down the firm’s liabilities, for example, they wouldn’t declare a dividend at all. When dividends are provided, they are usually
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