Question-61: What is the Preferred stock?

Answer: As name suggest it is a stock and not the debt instruments. But it has similar characteristics as debt instrument (bond). For example in case of owner of common/equity stock, the preferred stockholder is entitled to dividends. However, preferred stock dividends are a specified percentage of par or face value which is called the dividend rate.

Question-62: What happen if issuer, is not able to pay the dividend in case of preferred stock?

Answer: If issuer is not able to make preferred stock dividend payments it does not force the issuer into bankruptcy. If initial few dividends are not paid then, depending on the terms of the issue below can happen

• Dividend amount would be accrued until it is fully paid. Preferred stock with this feature is called cumulative preferred stock.
• If a dividend payment is missed and the owner of preferred stock must forgo this dividend payment, the preferred stock is said to be noncumulative preferred stock.
• Failure to make dividend payments may some restrictions on management. For instance, preferred stockholders might be granted voting rights.

Question-63: Between cumulative and non-cumulative preferred stock, which is considered as weak?

Answer: Non-cumulative preferred stock is considered as weak.

• The payments to preferred stockholders promised by the issuer are fixed,
• Preferred stockholders always have priority over common stockholders for getting dividend payments and distribution of assets in the case of bankruptcy. Because of this reason non-cumulative is considered weak.

Question-64: What is the perpetual preferred stock?

Answer: A Preferred which does not have maturity date is called perpetual preferred stock.

Question-65: What are the other features of the preferred stock?

Answer: Below are the characteristics of the preferred stocks

• Usually, preferred stock has a sinking-fund provision
• Sometime preferred stock is convertible into common stock.