Is preferred stock more like bonds or common stock? Explain.

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Is preferred stock more like bonds or common stock? Explain.

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Is preferred stock more like bonds or common stock? Explain.

Explanation & AnswerSolution by a verified expert

Explanation

The preferred stock is a type of a hybrid security which acts as a common stock and a debt security simultaneously. A preferred stock is shown on the equity section of the balance sheet, these stocks do not even have a maturity date and their payments are made in the form of dividends which are not tax deductible. All these features implies that preferred stocks can be treated as common equity.
 
However, the preferred stock also acts as debt securities wherein they have a priority of payment in case of bankruptcy over common equity. The dividend payment is an obligation for the company and preference shareholders don't have voting rights, unlike common equity.

Verified Answer

A preferred is a mix of both the debt and the common equity of a company.

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