Question

In what ways is preferred stock like debt and in what ways is it like equity? Provide two characteristics similar to debt and three characteristics similar to equity.

Answer 1

Preferred stock is hybrid security that has the characteristics of both debt and equity.

Similar to fixed-income securities, preferred stock pays preferred shareholders a fixed, periodic preferred dividend.

Like equity, preferred stock represents an ownership investment in that it does not require the return of the principal.

In general, preferred stock is more risky than debt but less risky than equity.

Similar to Debt:

1. Like debt, preference shares have a fixed dividend payout as stock carries a fixed dividend rate.

2. Like debt ,preferred stock guarantees regular payments of a preferred dividend.

Similar to Equity

1.It is traded on a exchange like an equity.

2.It has infinite life like an equity till it is sold.

3.Like dividends an equity,prefeered stock has non taxable dividends