1) Could you describe the characteristics of preferred stock and how it differs from common stock. And explain to me under what circumstances would a firm use prefered stock over common stock.
2) Could you describe the characteristics of a bond and give an example of a bond which exemplifies the following; government, local, and corporate.© BrainMass Inc. brainmass.com December 15, 2020, 11:37 am ad1c9bdddf
1. Could you describe the characteristics of preferred stock and how it differs from common stock? And explain to me under what circumstances would a firm use preferred stock over common stock.
Preferred stock is a security that shows ownership in a corporation and gives the holder a claim, prior to the claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Most preferred stock pays a fixed dividend that is paid prior to the common stock dividend, stated in a dollar amount or as a percentage of par value. This stock does not usually carry voting rights. Preferred stock has characteristics of both common stock and debt. Preferred stock is usually issued with a $100 par (face) value. The dividend payments are a fixed percentage of the par. For example, if the par value of a stock share were $100 with a 6 percent annual dividend rate, the annual dividend would be $6 on that share. In recent years, some companies have also begun issuing preferred shares with variable rates tied to interest rates. The par value is the most that the shareholder will receive if the company declares bankruptcy. Preferred stock is generally issued at its par value.
Preferred stockholders may be limited to voting only in these situations:
? When the company wants to merge with another
? When the company wants to liquidate a large portion of its assets
? When the company wants to issue new bonds or preferred stock
Preferred stock may carry a call provision. This means that the issuing company can repurchase the stock from the shareholders. Though preferred stock is usually called at par value, some call provisions actually tack on a premium.
Because of the steady dividends accorded to preferred shareholders, call provisions are not usually advantageous to them, despite any premiums. However, a corporation may use calls as a way to eliminate dividends, thus increasing earnings for common shareholders.
Preferred stock further divides into four types: cumulative, non-cumulative, participating and convertible.
Cumulative preferred stock accords its owner a continuous claim to his or her dividends. Any unpaid dividends accumulate until the corporation resumes paying them. Since the cumulative preferred owner is entitled to all past and present dividends, he or she is paid before common shareholders once payment is resumed. If the board of directors suspends dividends, the shareholder still has a claim on them.
Non-cumulative (straight) preferred is the opposite of cumulative preferred: it doesn't confer a steady claim on dividends in the event of a dividend suspension. Shareholders of this type may not be paid any missed dividends prior to payments being made to the common shareholders.
Participating preferred shareholders receive extra dividends over their nominal ones when the company makes an extra profit and the board of directors declares dividends.
Convertible preferred stock may be converted to a certain number of shares of common stock. Preferred investors who want the opportunity to share in the appreciation of the company's ...
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"Institutional Investors trading very large blocks of bonds do most of the trading in these securities. Most individual investors invest in government bonds through mutual funds. Overall, U.S. government bonds are very popular with investors worldwide."