Thomas   FAQ   March 16, 2012  

Shares Vs. Bonds

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Unlike dividend payments to shareholders, interest payments to bondholders by the issuer are contractual obligations and as such do not depend on the issuing company having available profits, or the company board approving interest payments. Upon maturity, the bond issuer is also required to return the capital by paying the face value of the bond to the bondholder. While these contractual obligations provide investors with some degree of certainty, it does not ultimately provide an iron clad guarantee. It is however, far better than the hybrid securities that many retail investors are familiar with. The list of companies that stopped paying coupons on hybrid securities grew substantially during the credit crisis as the board had the right to stop payments. With corporate bonds however, the only way to stop payment is to declare bankruptcy.

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