Which one of the following statements correctly distinguishes between bonds and stocks?

• A. Stocks have a fixed maturity date, while bonds do not.
• B. Bonds represent a company's debt, while stocks represent ownership in the company.
• C. Interest payments on bonds are optional, while dividends on stocks are mandatory.
• D. Bonds give holders voting rights in the company, while stocks do not.

Answer: (B)

Verified step by step guidance

1. Understand the fundamental difference between bonds and stocks: Bonds are debt instruments issued by a company or government to raise funds, while stocks represent ownership in a company.
2. Recognize that bonds typically have a fixed maturity date, meaning the issuer must repay the principal amount at a specified future date, whereas stocks do not have a maturity date.
3. Note that interest payments on bonds are contractual obligations and must be paid as agreed, while dividends on stocks are discretionary and depend on the company's decision to distribute profits.
4. Understand that stockholders often have voting rights in the company, allowing them to participate in decisions like electing the board of directors, while bondholders do not have voting rights.
5. Conclude that the correct distinction is: Bonds represent a company's debt, while stocks represent ownership in the company.