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 stock—Many 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 stock—Ranked 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 stock—These 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 stock—If the dividend is not paid, it will accumulate for future payment. Exchangeable preferred stock—This type of preferred stock carries an embedded option to be

exchanged for some other security. Participating preferred stock—These 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 stock—This 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 stock—These issues have a "put" privilege, whereby the holder may (under certain conditions) force the issuer to redeem shares.

Monthly income preferred stock—A combination of preferred stock and subordinated debt Non-cumulative preferred stock—Dividends 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 bond’s 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.