Stocks and bonds are both financial instruments that companies can use to raise capital. Unlike stocks, which come with ownership rights, bonds leverage a company's debt. This debt is reported in the financial statements of the business. Secured bonds are often backed by a company's assets, whereas unsecured bonds are not. Instead, they depend on the company's cash flows for repayment, making them a riskier investment. Bonds may be issued by a company or a local, state, or federal government. From an investor's point of view, high-grade investment bonds have less risk and volatility compared with stocks. Because of this, bonds can be favorable investments for risk-averse investors.
At A Glance
Issuing bonds comes with advantages and disadvantages for companies; issuing bonds provides capital but also accrues debt on financial statements.
- Bonds are used to raise capital for a company, and they have a long-term impact on the business.
Stocks, unlike bonds, are not loans, and they offer a share of ownership in the company.
- The debt to equity ratio is a measure of a company's financial health.
Government bonds and corporate bonds have different terms, risks, and returns.
Asset-backed securities are financial securities collateralized by a pool of assets such as loans, leases, credit card debt, royalties, or receivables. For investors, asset-backed securities are an alternative to investing in corporate debt.
- There are both government and private asset-backed securities.
- There are risks, such as prepayment and reinvestment risk, associated with asset-backed securities.