A Bond
A bond is a security of debt whereby the issuer owes a debt to the holders and in dependence of the bond terms he has an obligation to pay interest and also to pay the principal at the maturity date. A bond is a contract which is formal to repay money that is borrowed with interests at intervals that are fixed and there it is true that a bond is loan whereby the issuer is the debtor and the holder is the creditor and the interest is the coupon. Preferred stock is a ownership class in a corporation that has a claim that is higher on the earnings and assets than the common stock.
It has dividend that is paid before common stockholders dividends and these shares don’t have rights of voting. On the other hand, common stock is also a security representing ownership in a corporation. The holders exercise control by participating in elections of the BOD and voting on policies of the corporate. Common shareholders are entitled to assets of the company only after preferred shareholders and bondholders are paid. (Investopaedia, 2011).
The attributes of preferred stock affect its valuation in that they have superior rights cash flow and assets of a company versus common shareholders in the event of liquidation and bankruptcy and therefore these shareholders has no a great risk of losing than common stakeholders and there fore those people who are risk averse are likely to invest in preferred stock and also those who are want an income which is steady. The attributes of common stock affect its valuation in the common stockholders are the last to be paid incase of liquidation or bankruptcy and therefore they are risky.
The people who invest in common stock are risk takers and those who are betting on the growth of the company and capital gains. The attributes of bonds affects its valuation in that it offers the investor an opportunity to participate in appreciation of stock price, and also offers a way to reduce the risk which is associated with investment in stock and therefore the people who invest in bonds are those that interested in a safer place to keep their cash. (Anonymous, 2011).
References
Investopaedia, (2011): What is the difference between preferred stock and common stock? – Investopaedia ULC.
Anonymous, (2011): The valuation and characteristics of bonds. Retrieved from http://www.slideshare.net/Alamgir_Alwani/Chapter-06-Valuation-Characteristics-of-Bonds on 14-5-2011.
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