Shares and Bonds as Sources of Capital for firms

What is the definition of shares?

Certificates of ownership issued by a company

Entitled to share company profit

what is the definition of bonds?

Certificates of debt issued by the company

Pay principal on or before the maturity date

Pay interest to bondholders as compensation

General Info of Bonds and Shares

• transacted at Hong Kong exchange and clearing limited

• Gov can also issue bonds → US treasury bills

Difference between shares and bonds

Roles and Rights:

• Shareholders → owners of company; have voting rights at shareholders’ meetings

• Bondholders → creditors/ lenders of the company; no voting rights

Types of return:

• Shareholders → receive dividends that vary with company profits

• Bondholders → receive principal on or before maturity date; is fixed

Conditions for return:

• Shareholders → may or may not be be distributed depending on company profits

• Bondholders → must be paid whether have profits

Maturity date:

• Shareholders → no maturity date

• Bondholders → pay principle on or before maturity date

Priority of payments when company liquidates:

• Shareholders gets capital last

• Bondholders paid before shareholders

Advantages of buying shares

• voting rights at shareholders meetings

• Interest might be greater than fixed interest of bondholders

Disadvantages of buying shares

• unstable returns bc vary w/ company profits

• Less profit or loss → earn no interest or lower than fixed interest of bondholders

• Last to get capital refund when company liquidates

Advantages of buying bonds

• stable bc fixed no matter company income

• Even if less profit interest is fixed

• Higher priority than shareholders to get capital funds when company liquidates

Disadvantages of buying bonds

• no voting rights at shareholders meetings

• Interest moight be lower than dividends of sharehodlers