Question

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

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. 

Answer 2

The correct option is (A).

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

Further Explanation:

Justification for the correct and incorrect answer:

A.)

A bond typically pays a fixed, predictable amount of interest each year:This option is correct.

A bond pays a fixed amount of interest each year, and the amount is predictable; also, the bondholders get the benefit of interest to be paid first if the company is in loss also.

B.)

Stocks are stable and do not change often:This option is incorrect.

Stocks are unstable, volatile in nature, and their value changes often. And their dividends are also unpredictable.

C.)

Bonds are issued by many different entities:This option is incorrect.

Bonds can be issued by many different entities or companies. But this option does not make any sense regarding the lower-risk investment of the bond than the stock.  

D.)

Well-established company stocks pay dividends to their investors:This option is incorrect.

Well-established company stocks do not mean that they will pay dividends to their investors. The company might retain profits and can invest the amount in the future.

Learn More:

1. Stock and bonds  

brainly.com/question/1330190

2. Stock price  

brainly.com/question/11192535

3. Stock portfolio  

brainly.com/question/5728646

Answer Details:

Grade: High school

Chapter: Stocks and bonds

Subject: Business studies

Keywords: Why is a high-quality bond typically considered a lower-risk investment than stock, a bond typically pays a fixed, predictable amount of interest each year, stocks are stable and do not change often, bonds are issued by many different entities, well-established company stocks pay dividends to their investors.