Question

Compare the risks and returns of a 10-year bond, a preferred stock and a common stock issued by a listed company. Explain the reason(s).

Answer 1

Return of common stockholders would be highest among all these, because equity shares are always dependent upon capital appreciation and dividend yield and if the company is growing in these years, equity shareholders will be gaining maximum

Return of preferred stock will the higher than bonds but lower than common stock because they will have a fixed amount of dividend payments and they will not gain from much of the appreciation as they are not considered as the complete owners so their return will be moderate.

Return of bonds will be lowest among all these because these bonds are mostly dependent upon interest payments and principal payment at the end of the maturity so they are highly safe and less risky having a lowest rate of return among all this.

Risk of obonds would be lowest among all these as these bonds are considered safest and these bonds are also long term bonds as it is reflected that it is a 10 year Bond and these bonds will also be having surety of the payment of principal.

Preferred stocks are having a moderate risk because they are secured with fixed dividend and they are also having a prior claim on the assets then equity shareholders or common stockholders

common stockholders would be most exposed to the risk as they are not secured and they will not be having any prior claim on the assets even in the event of liquidation of the company.