The Bond vs. the Share of the Same CompanyEasy
One company, two claims on it, and almost nothing else in common. The difference is not how much risk you take — it is what you are owed and when.
3 min read · 569 words
The two claims
- A bond is a loan with dates on it: a fixed amount of interest, on stated days, and the principal back at the end. The company owes you that whether it does well or badly.
- A share is ownership of whatever is left after everybody else is paid. Nothing is promised, and there is no end date.
- They are not two points on a risk scale. They are different kinds of thing, and the difference shows up most clearly in the outcomes where they disagree.
Where they part company
| Bond | Share | |
|---|---|---|
| What you are owed | A stated amount, on stated dates | Whatever is left over |
| Best case | Paid in full, and no more | No ceiling |
| If the company thrives | Nothing changes for you | You own the improvement |
| If it struggles but survives | Paid in full | May receive nothing for years |
| If it fails | A claim, ahead of shareholders | Usually nothing |
| Who decides your income | The contract | The board, each year |
| Voting | None, unless in default | Yes |
The asymmetry is the whole point
- A bondholder's best possible outcome is being repaid. That caps the upside at the coupon, which means the analysis is entirely about the downside: can they pay?
- A shareholder's worst outcome is zero and the best has no limit, so the analysis runs the other way: how much better could this get?
- The same piece of news therefore lands differently. A company borrowing heavily to expand improves the shareholder's range of outcomes and worsens the bondholder's, from one announcement. Neither reaction is a mistake.
A worked case
A company owes 100 to bondholders and its assets are eventually sold. Three outcomes:
- Sold for 300. Bondholders receive 100 — exactly what they were owed. Shareholders receive 200.
- Sold for 100. Bondholders receive 100. Shareholders receive nothing.
- Sold for 60. Bondholders receive 60, a loss of 40%. Shareholders receive nothing.
Between the first and second outcome the bondholder's result is identical and the shareholder's changes by everything. Between the second and third the shareholder's result is identical and the bondholder's changes. What you get if the company goes bust sets out the full queue.
Four things that blur the line
- Subordinated debt sits between them by contract, and a contingent convertible can be written down while shares still exist. The 2023 write-down is the case.
- A convertible bond is deliberately both: a bond with an option to become a share.
- Preference shares pay a stated dividend and rank above ordinary shares, which makes them share-like in law and bond-like in cash flow.
- A distressed bond starts behaving like equity: once repayment is genuinely in doubt, its price responds to the business rather than to interest rates.
Reading them together
- When a company's bonds and shares move in opposite directions on the same day, that is usually information about the balance sheet rather than about the business.
- When the bonds fall sharply and the shares do not, the bond market is pricing a doubt about payment that has not yet reached the equity story — which is worth noticing rather than acting on, and the reason many equity analysts watch credit spreads. Credit spreads is the mechanism.
- Neither instrument is safer in the abstract. A bond of a fragile company can be riskier than a share of a robust one, and the risk profiles on this site mark which failure mode drives each, rather than ranking them.