PREFERRED STOCK

An equity security with properties of both an equity and a debt instrument, and is generally
considered a hybrid instrument. Preferreds are senior (i.e. higher ranking) to common stock, but
subordinate to bonds in terms of claim (or rights to their share of the assets of the company)
Features of Preferred Stock
Preference in dividends
Preference in assets, in the event of liquidation
Convertibility to common stock.
Callability, at the option of the corporation
Nonvoting
Preferred stock may be cumulative or noncumulative
Preferred stock may or may not have a fixed liquidation value (or par value) associated with
it. This represents the amount of capital which was contributed to the corporation when the
shares were first issued.
Preferred stock has a claim on liquidation proceeds of a stock corporation equal to its par
(or liquidation) value, unless otherwise negotiated. This claim is senior to that of common
stock, which has only a residual claim.
Some preferred shares have special voting rights to approve extraordinary events (such as
the issuance of new shares or approval of the acquisition of a company) or to elect directors,
but most preferred shares have no voting rights associated with them; some preferred
shares gain voting rights when the preferred dividends are in arrears for a substantial time.
Types
Prior preferred stockMany companies have different issues of preferred stock outstanding at
one time; one issue is usually designated highest-priority. If the company has only enough
money to meet the dividend schedule on one of the preferred issues, it makes the payments on
the prior preferred. Therefore, prior preferreds have less credit risk than other preferred
stocks (but usually offers a lower yield).
Preference preferred stockRanked behind a company's prior preferred stock (on a seniority
basis) are its preference preferred issues. These issues receive preference over all other classes
of the company's preferred (except for prior preferred). If the company issues more than one
issue of preference preferred, the issues are ranked by seniority. One issue is designated first
preference, the next-senior issue is the second and so on.
Convertible preferred stockThese are preferred issues which holders can exchange for a
predetermined number of the company's common-stock shares. This exchange may occur at
any time the investor chooses, regardless of the market price of the common stock. It is a one-
way deal; one cannot convert the common stock back to preferred stock.
Cumulative preferred stockIf the dividend is not paid, it will accumulate for future payment.
Exchangeable preferred stockThis type of preferred stock carries an embedded option to be
exchanged for some other security.
Participating preferred stockThese preferred issues offer holders the opportunity to receive
extra dividends if the company achieves predetermined financial goals. Investors who
purchased these stocks receive their regular dividend regardless of company performance
(assuming the company does well enough to make its annual dividend payments). If the
company achieves predetermined sales, earnings or profitability goals, the investors receive an
additional dividend.
Perpetual preferred stockThis type of preferred stock has no fixed date on which invested
capital will be returned to the shareholder (although there are redemption privileges held by
the corporation); most preferred stock is issued without a redemption date.
Putable preferred stockThese issues have a "put" privilege, whereby the holder may (under
certain conditions) force the issuer to redeem shares.
Monthly income preferred stockA combination of preferred stock and subordinated debt
Non-cumulative preferred stockDividends for this type of preferred stock will not accumulate
if they are unpaid

CORPORATE DEBT (bond)

A corporate bond is a bond issue by a corporation. It is a bond that a corporation issues to raise
money effectively in order to expand its business. The term is usually applied to longer-term debt
instruments, generally with a maturity date falling at least a year after their issue date.
The term "corporate bonds" is used to include all bonds except those issued
by governments in their own currencies.
Corporate bonds are often listed on major exchanges (bonds there are called "listed" bonds)
and the coupon (i.e. interest payment) is usually taxable. Sometimes this coupon can be zero
with a high redemption value.
Some corporate bonds have an embedded call option that allows the issuer to redeem the
debt before its maturity date. Other bonds, known as convertible bonds, allow investors to
convert the bond into equity.

Types of Corporate Bonds

Corporate bonds can be issued as secured, unsecured, senior or subordinated. Secured corporate
bonds indicate that the bond is backed by collateral of some kind, while unsecured bonds are
backed by little but faith. Bonds for senior debt are also commonly secured by some sort of
collateral and are almost always repaid before any bonds for subordinated debt. In addition, some
corporate bonds may offer a call option, which would allow the corporation who issued it to
essentially redeem their debt prior to the maturity date of the bond.

Risks of Corporate Bonds

Corporate bonds are widely considered to possess a much higher default risk, though this depends
on the corporation, market conditions, company rating and the governments that the issuer of the
bonds is compared to. Here is a brief list of other risks to consider before investing in corporate
bonds:
Interest Rate Yields can change, bringing a change in the value of bonds.
Supply Price depression can occur if similar, but new bonds are issued heavily.
Credit Spread If the credit spread becomes insufficient to compensate for the default, the value
obviously deteriorates.
Liquidity Bonds can be difficult to sell at a price that is anywhere comparable to what was
originally paid for them if there is no interest in the secondary market.
Tax Change Any taxation changes have the potential to negatively impact a corporate bonds
value, as well as its value on the market.
Inflation As always, fixed funds are reduced in real value by inflation. If inflation is at all
anticipated, prices may be drop almost immediately.