“Common stock is the riskiest corporate security, followed by preferred stock and then bonds.” Is it...

“Common stock is the riskiest corporate security, followed by preferred stock and then bonds.” Is it correct,explain in detail

Solutions

Expert Solution

Yes, common stock is the riskiest corporate investment security, followed by preferred stock and then bonds.

Common stocks are paid the last in case of a profit or the management can also decide to retain the earnings. Preferred stocks are paid a certain interest rate in case of profits. Bonds have a fixed rate of coupon to be paid even if the company makes losses hence, it is the most secured form of investment out of the three.

Even in case of company liquidation, bond holders are paid the first out of asset liquidation. Preference share holders are paid after them and equity holders are paid the residual amount.

Equity shareholders have the risk of loosing the entire amount of money paid for the share and also have an unlimited upside risk. They are given a share of the company and are part owners.

Preference shareholders do not have any voting rights and a limited upside potential in case of company success. Bond holders do not have any upside risk as their payment is fixed. They only have a risk in case the company defaults.

Hence, it is corretly said that,common commonis the riskiest corporate security, followed by preferred stock and then bonds.

Let me know in the comment section in case of any doubt.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Pick ONE: Discuss the similarities and differences of preferred stock, common stock and corporate bonds. What...

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.

List three distinguishing characteristics of corporate common stock (versus preferred stock or bonds): (3 pts.) 1.)...

List three distinguishing characteristics of corporate common stock (versus preferred stock or bonds): (3 pts.) 1.) 2.) 3.)

Green Forest Banking has issued bonds, common stock, and preferred stock. The YTM for the bonds...

Green Forest Banking has issued bonds, common stock, and preferred stock. The YTM for the bonds is 10.9 percent and the expected annual return for the common stock is 17.3 percent. Which of the following assertions about the expected annual return for the preferred stock issued by Green Forest Banking is most likely to be true? A) The expected annual return for the preferred stock is 17.3 percent B) The expected annual return for the preferred stock is 10.9 percent...

Company finance structure is 25% bonds, 10% preferred stock, and 75% common stock, the bonds each...

Company finance structure is 25% bonds, 10% preferred stock, and 75% common stock, the bonds each have a face value of $1,000, selling at a discount of $35 today with maturity in 10 years, annual coupon interest of 8% and flotation cost of 2 1/2%, companys tax rate is 34%, preferred stock has a 7% annual dividend and par at $100 which can be sold today for $85, underwriters fee for the sale would be $2 per share, new common...

would you like to invest in common stocks, preferred stocks, corporate bonds or Treasury bonds during...

would you like to invest in common stocks, preferred stocks, corporate bonds or Treasury bonds during COVID-19 pandemic? What will be the advantages and disadvantages of investing in each of these assets?

QUESTION: In the case of liquidation, common stockholders are paid first, followed by preferred stockholders, followed...

QUESTION: In the case of liquidation, common stockholders are paid first, followed by preferred stockholders, followed by bondholders. ANSWER OPTIONS: True False You need to specifically state IN THE SUBJECT LINE if the answer is TRUE or FALSE. EXAMPLES OF INADEQUATE RESPONSES: “I think the answer is False.” OR “The correct answer is “C.” Postings must be no less than 200 words in length to be considered. Any posting less than 200 words in length will not be reviewed.

Contrast common stock, preferred stock, and bonds payable. What are the similarities? What are the differences?...

Contrast common stock, preferred stock, and bonds payable. What are the similarities? What are the differences? Are bonds and mandatorily redeemable stock reported any different in the financial statement? Why?

Contrast common stock, preferred stock, and bonds payable. What are the similarities? What are the differences?...

1. Explain the use of Common Stock, Preferred stock, Convertible Preferred Stock and Participating Preferred Stock...

1. Explain the use of Common Stock, Preferred stock, Convertible Preferred Stock and Participating Preferred Stock in a VC/Start-up financing setting. Describe the advantages and disadvantages of each type of contract by VCs. 2. Banking Questions (1) Explain the differences between Commercial and Investment banking. (2) Describe some of the ways in which banks are regulated. Explain why banks are heavily regulated (3) Describe the role that these institutions play in the economy.

Compare the risks associated with investments in a. Corporate bonds b. Government Bonds c. Common Stock...

Compare the risks associated with investments in a. Corporate bonds b. Government Bonds c. Common Stock d. Preferred Stock e. Derivative f. Currency

Subjects