Are uninsured bonds safer than stocks in cases of default?

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  • 1 decade ago
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    Even uninsured bonds rank higher in the capital structure of a business than the stock or the equity of the business. In the event of a default or a bankruptcy, bonds or debentures have a higher ranked claim in the distribution of assets. Equity holders have what is called a residual claim which is the remainder after all other claims have been satisfied.

    Bond insurance generally applies to municipal bonds rather than corporate bonds. In the case of a municipality, there really is no "equity" per se. So corporate bonds are never insured.

    The shareholder ranks at the very bottom of the capital structure totem pole in terms of his claim to the assets. In an accounting sense, the shareholder equity is the difference between the assets less the prior claims, the liabilities. For accepting such a low rank, the equity holder has the right to appoint management (which no one else in the capital structure has) and has the right to participate in the growth of the firm, often through a growing dividend stream. If the firm is sold, nobody else's position in the firm can reflect any "growth." of the value of the firm.

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