Final answer:
The correct answer is B. Preferred stock and long-term bonds are similar because interest and dividend payments are fixed. Bonds are a legal obligation and tax-deductible, while dividends on preferred stock are not. Neither typically provides voting power.
Step-by-step explanation:
Preferred stock and long-term bonds are similar in that interest and dividend payments are fixed. They both provide a fixed income to investors, which is clearly defined upon issuance. With preferred stock, shareholders receive dividends that are typically set at a fixed rate and are paid out before dividends to common stockholders. Long-term bonds provide interest payments, also at a fixed rate, called the coupon rate, over a specified period.
The major distinction between the two lies in their legal obligation to pay and tax treatment. Bond interest payments are considered as a legal obligation and are tax-deductible expenses for the issuing company. In contrast, dividend payments on preferred stock are not legal obligations and are paid from after-tax profits, making them not tax-deductible for the company.
It's also important to note that neither preferred stock nor long-term bonds typically provide voting power to the holders, which is a right usually reserved for common stockholders.