Question

Explain how yields are calculated on bonds and preferred stocks of comparable quality. Which is preferred and why?

Answer 1

The yields are calculated on bonds and preferred stocks of comparable quality on the basis of current price of the security and dividend rate / coupon rate on the securities.

On account of the yield of the securities are concerned, the Preferred stocks are always preferred to that of bonds because preferred stock has higher yield to that of bonds which is a compensation towards the higher risk attached to the preferred stocks.

On account of interest payment, the bonds are having upper-hand to that of preferred stocks because interest which is paid before taxes and also it is legal obligations, but the preferred dividends are paid after tax and there is no legal binding on concern to pay if in financial difficulties.