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Additional Details
I just had to mess with you again Sherlock !
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larry G | Question for People with a very good knowledge of finance? 10 pts to first correct answer.? |
Question about Corporate Bonds (for people with good knowledge of corporate finance)?
If company x has 6% preferred (par $10),
a.) does the 6% represent the coupon rate?
b.) what does the par $10 mean
c.) Why does it follow that earnings of $18.60/share on X 6% preferred (par $10) are more favorable than earnings of $20/share on 7% preferred stock, par $100 (also company x),
Thank you,
-LG |
 |
 
gjg1957
|
Note. In concept, a preferred share can be thought of as similar to a bond, but there are some pretty significant legal differences. Bonds get paid out before preferred shares if the business crashes. In some countries (Canada) preferred dividends get a better tax treatment than bond interest. A preferred dividend must be paid before regular dividends, and a reputable company never likes to avoid preferred dividends (I had Nortel preferred through their first couple of bounces and they kept paying till they went completely broke.) Now to your questions.
a.) does the 6% represent the coupon rate?
Remember that these aren't bonds. But yes, this dividend rate corresponds to the coupon rate on a bond. It matters if the 6% is cumulative. If the company skips dividends on one cycle, a cumulative dividend is still owing when they recover to the point of paying dividends. If it's not cumulative, then
skipping it once is forgotten when it's time to restart paying dividends. Yield can be defined either on the par value or on the current price. It is always better to work with the cash amount.
b.) what does the par $10 mean
That's the nominal value that the preferred share was initially issued at. the 6% dividend is based on that $10 to yield $0.60.
If the company is wound up, the preferred shareholder gets paid out at $10. If the company retracts, it is probably at a price relative to the par.
c.) Why does it follow that earnings of $18.60/share on X 6% preferred (par $10) are more favorable than earnings of $20/share on 7% preferred stock, par $100 (also company x)
I think you're reading something wrong on both of these, or else I am. $18.60 on a $10 share? Or earnings of $20 on a $100 share? The latter is very high, and the former just wouldn't happen. |
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