Question

2. What is the difference between a bond’s coupon interest rate, current yield, and required rate of return?

3. What do bond ratings show you?

4. What is a preferred stock? Why preferred stocks are called hybrid securities?

Answer 1

2.

Bonds coupon interest rate is the rate set on the par or face value of the bond for the periodic payments promised by the issuer of the bond to the holder.

Current yield is the yield calculated on the maket price of bond rather than the face value and is equal to annuals coupons divided by the market price of bond.

The required rate of return is the minimum yield to maturity the investor requires for investing ina bond

3. Bond ratings evaluate the credit worthiness as well as the quality of the bond issue based on various factors like loss on default, risk of default, timeline of payments etx. They are issued by credit rating agencies. Higher the rating, lower is the yield and vice versa.

4. Preffered stock are another instruments to raise money by Corporations and they hold both the characteristics of bonds and stocks and thus they are called hybrid securities. They are senior in the ownership than ordinary stocks and hold some equity rights , they also have timeliy dividends in case of profits just like bonds that's why they are hybrid.

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