Question

Four years ago, sam invested in grath oil. she bought three of its $1,000 par value bonds at a market price of 93.938 and with an annual coupon rate of 6.5%. she also bought 450 shares of grath oil stock at $44.11, which has paid an annual dividend of $3.10 for each of the last ten years. today, grath oil bonds have a market rate of 98.866 and grath oil stock sells for $45.55 per share. use the scenario above to consider which statement best describes the relative risk between investing in stocks and bonds. a. it is equally likely that the company would suspend paying interest on the bonds and dividends on the stock. b. both the coupon rate and the dividend rate are fixed and cannot change. c. the market price of the bonds is more stable than the price of the company's stock. d. the amount of money received annually in interest (on the bonds) and in dividends (on the stocks) depends on the current market prices.

Answer 1

The statement that best describes the relative risk between investing in stocks and bonds is : The market price of the bonds is more stable than the price of the company's stock.

What is a bond?

A bond is loan from an investor to a borrower such as a company or government. Here, the borrower uses the money to fund its operations, and the investor receives interest on the investment.

In the above context, the market value of the bonds of Grath Oil is more. The market price of the bond is the amount of the money to be paid in an open market to buy a bond.

Hence, the bond's market price is much more stable than the price of the company's stock. It is riskier to invest in company stocks.

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