Final answer:
Preferred stock resembles a bond when it includes a mandatory redeemable feature. This feature requires the company to repurchase the stock at a set date, providing a predictable return similar to bond coupon payments.
Step-by-step explanation:
Preferred stock is similar to a bond when it features a mandatory redeemable feature. This means the stock is required to be bought back by the corporation after a certain period, akin to the maturity of a bond. Both preferred stock with this feature and bonds provide a predictable income stream; preferred stock through dividends and bonds through coupon payments. However, unlike common stock, preferred stock usually does not confer voting rights, aligning it more with debt instruments like bonds.
Bonds typically have a coupon rate, which is the interest paid on a bond. Dividends from preferred stock, particularly when they have a mandatory redeemable feature, function similarly to bond coupon payments by providing regular income to the investor. The corporation itself is a business owned by shareholders. When a corporation issues either bonds or preferred stock, it is seeking funds to use in the operations or growth of the business while offering investors a return on their investment.