Question

In which way(s) is preferred stock like a bond? Multiple select question.

a) Preferred shareholders receive a stated value if the firm liquidates, like bondholders.
b) Some preferred stock has credit ratings, like bonds.
c) Preferred stock sometimes has a sinking fund, giving it a set maturity like bonds.
d) Preferred stock dividends are tax deductible for the issuer, like interest on bonds.
e) Preferred dividends, like interest, must be paid lest the firm be in default.
f) Preferred shareholders receive a stated dividend, similar to interest on a bond.

Answer 1

Preferred stock is similar to bonds in that preferred shareholders often have a priority claim on assets, some preferred stocks are credit rated, and they may have a sinking fund like bonds. However, preferred dividends are not tax-deductible and are not mandatory like bond interest payments.

Step-by-step explanation:

Preferred stock shares some similarities with bonds in a few ways. Like bondholders, preferred shareholders often have a priority claim on assets over common stockholders if the firm goes into liquidation, receiving a stated value. Additionally, some preferred stocks are rated by credit agencies, providing investors with a gauge of their credit risk, similar to bonds. Preferred shares may also feature a sinking fund, which is a financial tool serving to retire preferred shares over time, giving preferred stock a characteristic like the set maturity of a bond. However, not all preferred stock features are bond-like – while the dividends on preferred stocks are fixed much like bond interest, these dividends are typically not tax-deductible for the issuer, unlike bond interest. Also, companies are not generally obliged to pay preferred dividends in the same way they must pay bond interest, and they can defer these without being in default.