how do preffered securities work?

Answer 1

Two sources of “cashflow” or income to the investor (UBS Ag):
- Regular income distribution as the main income of each quarter ( being a loan to coy, almost guaranteed, fixed income );
- Dividends received has first priority over ordinary share holders when a company pays dividends (dependent on the company (coy) whose stocks were bought into, variable income subject to performance of the coy ).


Tax and Right to first claim implications (Primer):
- Tax purposes treated as debt for under Tier I capital by US Federal Banking Standards; a loan by investors to a coy;
- In the event of a coy folding under, repayment of preference debt are to preferred debt holders, followed by other loans made to the coy, creditors or suppliers;
- At a foreseeable maturity date, a sum certain will be paid akin to debt borrowings;
- Debt capital does not diluting the existing shareholder;
- For large coys; medium sized and smaller coys tend to use it incorrectly as a last resort.


Administrative implications (Primer):
- 4% issuance fee is charged for placing the securities with investors, therefore;
- Expensive for small and medium companies to raise money;
- Common practice of $5 -15 million range loan undertaking of a coy.

Answer 2

A prefered security is essentually a debt instrument similar to a bond but below a bond in claim upon the assets of the company. It is ahead of common stock in claim upon the assets. Whereas a bond has a specified redemption date, prefered stock does not unless it is called. It pays a fixed dividend which in many cases is accumulative. That means that if for some reason the company can not pay it, the dividend accumulates for later payment. Some prefered stock is convertible into common stock. That is a special class of prefered stock.

From an investment point of view, prefered stock does have one advantage over a bond. The dividend on prefered stock is generally tax advantaged whereas bond interest is not.

Answer 3

A preferred stock or bond is paid before a common stock or bond of the company should there be a bankruptcy or liquidation; therefore, they are viewed as being safer investments.

Answer 4

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