Why is a high-quality bond typically considered a lower-risk investment than a stock?

A.) A bond typically pays a fixed, predictable amount of interest each year.

B.) Stocks are stable and do not change often.

C.) Bonds are issued by many different entities.

D.) Well-established company stocks pay dividends to their investors.

Question

Business

Stephanie

2 March, 07:21

Why is a high-quality bond typically considered a lower-risk investment than a stock?

A.) A bond typically pays a fixed, predictable amount of interest each year.

B.) Stocks are stable and do not change often.

C.) Bonds are issued by many different entities.

D.) Well-established company stocks pay dividends to their investors.

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Answers (1)

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Joaquin Tran · Answer 1

The answer is A.

There is risk involved in owning a stock, and many unknown variables. The value of the stock could plummet, putting your principal investment at risk. There is no guarantee of return on investment, and even well-established companies have had to cut dividends during difficult times.

In the case of bonds, you are guaranteed by the bond issuer that your principal and the agreed-upon interest will be paid at a defined time. Excluding the event of bankruptcy (and still likely in this case), you are virtually guaranteed that the entity will pay you according to the agreed-upon terms. For this reason, bonds are considered a much lower risk investment.

Why then, do many people choose to invest at least part of their portfolio in stocks? Stocks generally have a much high expected return, and many people consider this increased return worth the increased risk that with it.