Question

Compare and contrast the similarities and differences between preferred bonds and the regular corporate bonds. Please collaborate and provide some examples for illustration purpose (if applicable).

Answer 1

Preferred bond is a part of corporate debt which is senior in terms of repayment or claims.

Preferred bond is similar to usual corporate bond in the following aspects:

1. Both are debt instruments offering definite interest rate (fixed or floating). Unlike preferred stock or common stock, obligation for interest payment is not liked to profit earned.
2. Both Ordinary bonds and preferred bonds have specified tenure and redemption plan
3. Interest on both the bonds are deductible for tax purpose, for the issuer
4. Both these bonds are senior to common stock or preferred stock in the case of repayment

Difference between ordinary bonds and preferred bonds is in the seniority , between them, in terms of repayment obligation or right of the holder. This comes into play in the event of bankruptcy or liquidation of the issuer. In such an eventuality, the preferred bond will have priority in order of repayment over the ordinary bond. The ordinary bond will be repaid only after repayment of the preferred bond.