Stockholders' Equity: Classes of Capital Stock

Read this chapter, which introduces long-term bonds, their value, how they compare with stock. Some companies expand using stock, while some use debt (bonds). The example exercises refer to Appendix A, which is included here.

Comparison with stock

A bond differs from a share of stock in several ways:

  • A bond is a debt or liability of the issuer, while a share of stock is a unit of ownership.
  • A bond has a maturity date when it must be paid. A share of stock does not mature; stock remains outstanding indefinitely unless the company decides to retire it.
  • Most bonds require stated periodic interest payments by the company. In contrast, dividends to stockholders are payable only when declared; even preferred dividends need not be paid in a particular period if the board of directors so decides.
  • Bond interest is deductible by the issuer in computing both net income and taxable income, while dividends are not deductible in either computation.