Which of the following is not a characteristic of bonds? The bondholder has the right to receive periodic interest payments at a specified percent of the bond’s face value. The bondholder has the right to receive the face value of the bond at a specified date in the future. A long term liability results. Bondholders have the same rights as shareholders.
The Correct Answer and Explanation is:
Correct Answer: Bondholders have the same rights as shareholders.
Explanation:
Bonds are a type of debt instrument used by companies, municipalities, or governments to raise capital. When an entity issues bonds, it borrows money from investors (bondholders) and promises to repay the face value (principal) on a specified maturity date along with periodic interest payments, often referred to as coupon payments.
Let’s examine each statement to determine which one is not a characteristic of bonds:
- “The bondholder has the right to receive periodic interest payments at a specified percent of the bond’s face value.”
✅ True.
This is one of the main features of a bond. The issuer pays interest (coupon) to the bondholder, typically semi-annually, annually, or at another agreed interval. The interest is calculated based on the bond’s face (par) value and the stated interest rate (coupon rate).
- “The bondholder has the right to receive the face value of the bond at a specified date in the future.”
✅ True.
This is known as the maturity of the bond. At the end of the bond term, the issuer is obligated to repay the bondholder the original amount borrowed (face value or principal).
- “A long-term liability results.”
✅ True.
From the issuer’s perspective, bonds represent long-term liabilities because they are debts that must be repaid in the future, usually beyond one year.
- “Bondholders have the same rights as shareholders.”
❌ False – This is the correct answer.
Bondholders do not have the same rights as shareholders. Shareholders are owners of the company and may have voting rights, dividends, and residual claims to assets. Bondholders are creditors, not owners. They have no voting rights and do not share in company profits beyond their fixed interest payments. If the company liquidates, bondholders are paid before shareholders but have no say in corporate governance.
Summary:
Bondholders are creditors with contractual claims, while shareholders are owners with equity rights. This distinction is crucial in understanding the nature of bonds versus stocks. Therefore, the statement “Bondholders have the same rights as shareholders” is not a characteristic of bonds.