Question

Pick ONE:

Discuss the similarities and differences of preferred stock, common stock and corporate bonds.

What are present value and future value? How are they calculated? What do they represent? Why use them?

What is the Time Value of Money? Discuss three reasons supporting why this is true.

Answer 1

The similarities between the two types of stocks and bonds are as follows :

• they are the different ways to invest in companies.
• They are issued to the general public.
• They are helpful in raising funds.

The difference between them are:

• Bonds are like loans which carry no ownership or liability on the assets of the company. They are backed with fixed rate of interest. The interest is a fixed expense on companies earning.At the time of liquidation they are paid first.
• Common stock holders are called the owners of the company. They get the residual part in the earnings of the company in the form of dividends. At the time of liquidation they are paid the last.
• Preference stock lies between bonds and common stocks that is, they enjoy the benefits of fixed income like bonds but they do carry the residual payment of part of the common stock. They are also the owners of the company. Over the common stockholders they enjoy two kinds of privileges that is, 1. If dividends are paid , they are paid first and then common stockholders. 2. At the time of liquidation they will be paid first and then the common stockholders.