What are the differences between preferred stocks and bonds?

Answer:

Although the holders of preference shares and bonds have the right to make regular payments of distributions preferred shares have no maturity date and can continue indefinitely. The bondholders are entitled to regular payments, the interest rate, while preference shareholders receive regular dividend payments.

Bond holders are creditors of the company having lent him money, while holders of preferred shares owns part of the company. Unlike the payment of bonds which are mandatory, the preference shareholders can skip some payments of dividends, if the company does not make a profit. If preference shares are cumulative, the investor is entitled to receive payment for skipped dividends before any dividends are paid to holders of ordinary shares.

The bonds have a fixed maturity date and ultimately expire, limiting the amount of interest paid. Preferred stock continue as long as the company is in the business. Bondholders, as creditors, have a high chance to be chargeable against the holders of preferred shares, depending on the priority of the debt. Bonds may be secured by assets of the company. The principal can be returned to the owner in the sale of these assets in case of bankruptcy. Unsecured bonds are not secured by any assets of the company and have a lower probability of receiving any distributions in bankruptcy. (For associated reading, see: Corporate bankruptcy: a brief overview.)

Holders of preferred shares, also called preferred stock, receive dividends before common shareholders. The dividends are often fixed. In the event of bankruptcy or liquidation holders of preference shares have priority over common shareholders in pay when the company’s assets will be liquidated. In practice, the holders of preference shares are unlikely to receive any money upon termination of the bankruptcy, as they are fairly low on the list of priorities for repayment. (For associated reading, see: what are the advantages and disadvantages of preference shares?)

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