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In general, bonds are less risky than stocks. This is fundamentally because:a.Stocks cannot be purchased all the timeb.Stocks do not promise contractual paymentsc.Bonds offer annual cash paymentsd.All of them.e.Stocks represent ownership

Question

In general, bonds are less risky than stocks. This is fundamentally because:a.Stocks cannot be purchased all the timeb.Stocks do not promise contractual paymentsc.Bonds offer annual cash paymentsd.All of them.e.Stocks represent ownership

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Solution

The correct answer is b. Stocks do not promise contractual payments.

Here's the step-by-step explanation:

  1. Bonds are considered less risky than stocks because they have a defined term to maturity, at which point the principal is supposed to be returned to the bondholder.

  2. Furthermore, bonds also make regular interest payments to bondholders. These payments are contractual obligations, meaning the company is legally required to make them. If a company fails to make these payments, it can be forced into bankruptcy.

  3. On the other hand, stocks represent ownership in a company and do not promise any specific payments to shareholders. Dividends may be paid out to shareholders, but these are not guaranteed and can be cut or eliminated at any time.

  4. Therefore, the fundamental reason why bonds are considered less risky than stocks is that stocks do not promise contractual payments.

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