Question

In what respect is preferred stock similar to bonds, and in what respect is it simi- lar to common stock?

Answer 1

Similarities between preferred stock and bonds :

a. Both have a claim to an annual income in the form of dividends and interest respectively. Preferred stock involves fixed dividend payments to stockholders, and bonds involve fixed interest payments to bondholders.

b. Both have a fixed claim on assets of the company., though the claim of the preferred stockholders is subordinate to that of bondholders.

c. Both may be convertible or callable.

Similarities between preferred stock and common stock :

a. Both represent classes of ownership of a company.

b. Both have claims on the earnings of the company, and its assets, though the claim of the preferred stockholders is superior.

c. Both preferred and common stock have the potential of capital appreciation.

d. Both preferred and common stockholders are entitled to dividends., though the preferred dividends are to be paid out before the common dividends.