Question

• Paragraph 1 - an introduction explaining the basic features of bonds and preferred stock
• Paragraph 2 - a list of the aadvantages and disadvantages of using bond vs. preferred stock

Answer 1

Paragraph 1 : Bonds refers to the debt that the company raise to finance it's capital while the preferres stocks are the equityholders of the company as they are the owners of the company. The Value of the bond is measured by the present value of all the cash flows that the bond is going to generate over the years and the discount rate used is the interest rate prevailing in the market while the value of the preference share is the Annual Dividend divided by the interest rate.

Paragraph 2: Preference Shares are the equityholders of the company and they carry ownership rights while the bondholders are the debtholders pf the company and doesn't carry ownership right. In case of liquidation, Bondholders are paid first before the preference shares, The Bondholders are paid regular interest payments while shareholders are paid dividends and the interest paid to bondholders are tax shiel which helps to lower the cost of debt while the dividends are not tax shield and both the bonds and preferred shares are sensitive to the interest rate means the value fluctuates according to the interest rates.