Question

Please distinguish between debentures and mortgage bonds, how does a bond’s par value differ from its market value? Common stockholders receive two types of return from their investment. Explain. Why is preferred stock frequently convertible? Why is it callable?

Answer 1

MORTGAGE BONDS are the bonds collateralized by some assets or something that has value and can be sold to pay the bondholders if company defaults on payment of bond or goes into bankruptcy. while DEBENTURES have no such collateral , they are unsecured debts, backed only by the full faith and credit of issuing company.

Bond's Par Value is the value at which it is initially issued by the company to the bondholders. while the Market Value is the current value of such bond in the market which depends upon various factors like return on bond, company's performance, demand & supply, etc.

Common Stockholders receive two types of return from the company mainly in the form of

• Dividends : They are the sharing of profits of the company, it is paid to them after payments of all taxes, preference dividends, interest on loans & debentures , etc
• Capital Appreciation: The benefits from rises in the prices of share are the capital appreciation, it is enjoyed by the Common stockholders.

Preferred stock are the stocks of the company which do not enjoy the voting rights, but have preferrance in payment over common stocks, they have predetermined rate of payments.

In some cases company allows conversion of Preferred stock into Common Stock after a predetermined date, the value of a convertible preferred stock is ultimately based upon the performance of Common stock,

Callable Preferred Stock also known as Redeemable Preferred stocks is a type of preferred stock in which the issuer has the right to call in or redeem the stock at a present price after a defined date. It combines the elements of equity and debt financing. It is advantageous to the issuer as it gives him the flexibility to repay or redeem the preferred stocks when it has sufficient funds available with it.