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A firm’s preferred stock often sells at yields BELOW that of its bonds because…

A firm’s preferred stock often sells at yields BELOW that of its bonds because…

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Solution

The corporations which own stock may have an advantage of excluding the dividend income from the income taxes.

Also, the rates of taxes on the interests are higher as compared to the dividends. Also, the tax benefits in the case of corporations can go up to 100% if the dividend is received from a domestic corporation.

Thus since this gives an advantage to the preferred stock as compared to bonds thus the preferred stock often sells at yields below the bonds.

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