preferred stock

2 reasons investing in preferred stock is riskier than investing in bonds:

1- the order of payments results in preferred stock having a lower priority than bonds in a liquidation 2- dividends are not legally required to break paid, whereas the issuer has a contractual obligation to pay bond interest expense and repay the principal.

why does an issuer intends to pay preferred stock dividends even though they are discretionary (3 reasons)

1. The issuer cannot pay dividends to its common shareholders unless preferred shareholders are paid their stated dividend (see dividend preference, below). 2. Some corporations allow the preferred shareholders to take control of the corporation (i.e., vote) if they are not paid their stated dividends. 3.Failure to pay preferred dividends gives the issuer a bad reputation in the financial markets, which could make it difficult for the company to raise capital in the future.

Corporate Liquidation (order of payment)

In a corporate liquidation the priority of claim to assets is: secured creditors unsecured creditor preferred creditors common creditors

stated dividends are _____ guaranteed

NOT

acronym to remember the order of payment

SUPC

For the issuer, issuing preferred stock is less risky than issuing bonds because___

an issuer is not contractually obligated to make preferred stock-dividend payments, whereas it is obligated to pay the interest on any bonds it issues.

preferred stock has 2 preferences: ____ preference and liquidation preference

dividend

preferred shareholders typically _____ have the right to vote

don't

liquidation preference

if the corporation liquidates, preferred shareholders get paid off before common shareholders. Preferred shareholders will get the par value and perhaps any unpaid dividends.

dividend preference

if the corporation pays dividends, preferred stockholders must receive their stated dividend before common stockholders receive dividends

Stated dividends do not ____ over time

increase

with fewer investors in a financial market, the market is _____ efficient which provides __________ opportunity to outperform

less greater

stated dividends do not increase over time which ____ the potential for growth on an investment in preferred stock.

limits

From the investor's perspective, compared to investing in bonds, investing in preferred stock is _____ risky

more

the stated dividend may be a % of the ___ value

par

stated dividends apply to

preferred stock

the par value of preferred stock is the amount ___

repaid to the shareholder is the corporation is liquidated (included unpaid dividends)

Junior securities have a lower priority of claim on assets or income compared to ___

senior securities

investing in a corporation's preferred stock is riskier than investing in its bonds because____

the order of payments and paying bond interest is a contractual obligation under the bond indenture. If the issuer fails to make scheduled interest payments, the trustee of the bond issue can take action against the issuer to secure payment for the bondholders. But as we have seen, a corporation has no requirement to pay dividends, making preferred stock riskier to invest in than bonds.