Asked by Anonymous

My friend told me that buying bonds are always safer than buying shares of a company. This is true right?

From what he was telling me, if a company fails, They will have to pay back all the bonds first before paying back the people who own shares, that's why its always safer

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    • Loh Tat Tian
      Loh Tat Tian
      234 Answers, 337 Upvotes
      Answered on 22 Oct 2018

      What your friend tells you is just a common general statement (and should be correct more than 50% of the time).

      Though, there are varying factors in the composition of the bonds too. Junk Bonds (those whose bonds are backed by a company that is not strong , can go bankrupt). These are like penny stocks (especially if Asset is not more than liabilities).

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      • Question Poster
        Hi, may I ask how do you determine if a company is issuing "junk bonds"? What is the information that I should be looking out for?
        22 Oct 2018
      • Loh Tat Tian
        You can look at a few factors: 1) The investment grade given to the bond. 2) The yield of the bond (typically can go up to 10%/annum) 3) As mentioned earlier, the valued Assets and Liabilities. In a financial statement, the bond (liability) should be fully payable by the assets in the event the company folds (so as to protect your bond). If the assets are less than the liability, that is a warning sign.
        22 Oct 2018
    • Jason Sin
      Jason Sin
      329 Answers, 419 Upvotes
      Answered on 22 Oct 2018

      Not necessarily true. If a company fails, there is a risk that the company may not be able to repay both its shareholders and bondholders. However, it is true that bondholders are ranked higher than shareholders in a windup and bondholders may be able to get back some or all the money.

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    Hariz Arthur Maloy
    Hariz Arthur Maloy, Independent Financial Advisor at Promiseland Independent
    Top Contributor

    Top Contributor (Feb)

    358 Answers, 605 Upvotes
    22 Oct 2018

    Yes, other than just in the event of liquidation, bonds are less risky assets because their price is less volatile on the open market.

    Plus when held till maturity and without and default, you get what was promised to you.

    However, bonds also have their ratings. There are junk bonds, investment grade bonds, and the stuff in between. Higher rating, less likely to default.

    Equities are more volatile, and there's no maturity on a stock. You decide when to sell it. And especially in the short term, your stock price could be much lesser than how much you bought them for.

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