Compare Bonds, Common Equity, and Dividend Payments

Explain the difference between a bond and common equity. Compare the holder's claim, possible cash flows, and main risks, and explain whether an equity investor is guaranteed to receive dividends. ### Constraints and Clarifications Discuss general instrument characteristics rather than recommending an investment or making claims about a specific issuer. Distinguish contractual payments from payments that remain discretionary, and recognize that different bond terms and share classes can change the details. ```hint Separate ownership from a payment obligation A company's earnings, an obligation to pay a creditor, and a decision to distribute cash to shareholders are related but distinct concepts. ``` ### What a Strong Answer Covers - Debt as a contractual claim and common equity as a residual ownership interest. - Coupon and principal terms, including the fact that not every bond pays a regular fixed coupon. - Common-equity participation in value and distributions without a guaranteed dividend schedule. - General differences in priority, maturity, interest-rate exposure, credit risk, and business risk. - How dividend decisions depend on the company's governing process, financial position, and distribution policy rather than simply the existence of profit. ### Follow-up Questions 1. Can a profitable company choose not to pay a common dividend? 2. Why can a bond's market price change even if its promised cash flows have not changed? 3. How would preferred equity or a zero-coupon bond complicate a simple debt-versus-equity comparison?