Question

When comparing fixed rate Bonds with with finite life Preferred Stock, the following statement is not...

When comparing fixed rate Bonds with with finite life Preferred Stock, the following statement is not true

Both make fixed payments.

Preferred share uses the same model used for bond valuation: present value of dividends and the repayment of par value

Bonds are debt, but preferred stock is equity.

The same model used for bond valuation: present value of dividends and the repayment of par value

Preferred stock prices tend to fluctuate less than bond prices.

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Answer #1
  • True. Yes both make fixed payments based.

For Bonds the payments are fixed based on the coupon rate and the PAR value.

Preferred stocks also usually have a coupon rate that remains fixed but sometimesthe company may decide not to pay the dividends for a period due to companies performance. But whenever company decides to pay dividends again then the cumulative interset is paid along with the periods it was not paid for.

  • True. Yes both share the same model for valuation
  • Not True. Preferred stock prices tend to fluctuate more than bond prices since market value of a share is changing daily.
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