I need to write conceptualizing these questions:
1. Why are bonds considered as less risky investments than as stocks?
2. Discuss duration and portfolio immunization.
1. Bonds are less risky due to the fact that if a company goes bankrupt, bondholders will get paid off before stockholders. In other words, bonds have seniority over stocks. To illustrate this point, consider a company that goes bankrupt and has $50 million in bonds and $50 million in stocks. If the company has $50 million in assets, then the bondholders will get $50 million back (their full debt amount) and stockholders will get nothing. If the ...
This solution provides a brief overview of why bonds are less risky than stocks, and a discussion of duration and portfolio immunization.