Bonds

Bonds operate in much the same manner as a loan. A buyer pays the corporation a certain amount and receives a bond in return. The bond entitles the buyer to regular interest payments (at fixed intervals in amounts dependent upon the corporation). Each bond also has a specified maturity date, at which point the corporation must pay back the entire amount of the buyer’s investment. Typically, these interest and repayment rights are the bondholder’s only rights in the corporation. Note that governments also issue bonds, and these bonds may operate in a slightly different manner.

Preferred Stock Rights

In a typical corporation, the corporation’s governing documents (bylaws, articles of incorporation and shareholder agreements) determine the rights and obligations of preferred shareholders. Such rights may vary, but in a typical corporation, the preferred shareholders have the right to periodic dividend payments in amounts fixed by the corporation. If the board of directors does not make the dividend payment when it’s due, the preferred shareholders may be granted the right to vote on the board’s composition.

Preferred Stock Types

Preferred stock may be convertible, meaning that the shareholder has the right to exchange preferred for common stock at any time. Cumulative preferred stock allows the preferred shareholder to receive repayment of any missed dividend payments before other types of shareholders receive similar repayment. Corporations may also have different levels of preferred stock, with different seniority in the hierarchy of repayment.

Liquidation Priority

References

Corporations, Other Limited Liability Entities and Partnerships; Thomas Lee Hazen and Jerry W. Markham; West; 2008 Securities Regulation, Cases and Materials, Eleventh Edition; Coffee, John C. and Hillary A. Sale; 2009 MtHolyoke.edu: Types of Preferred Stock BuckInvestor: Common Stock vs. Preferred Stock Russell Investments: Stocks and Bonds

Resources

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