Explanations
Preference shares – features
These are equity and so can be traded on the Stock Exchange.
They pay a fixed annual dividend out of the company’s after tax income.
The company can defer preference dividend payments but has to pay the sums deferred before it can pay dividends on common shares.
There are usually restrictions on the company which are designed to protect the interests of the preference shareholders
Preference shares are often convertible into ordinary common shares. The conversion exchange formula is fixed up front. Preference investors surrender their shares and receive common shares.
Similarly, at liquidation, preference shares rank ahead of ordinary shares.
Bonds – features
These are loans to the company and have a contractual final maturity when the company has to repay the bonds.
The company pays interest at a fixed margin over a bench
mark rate. The latter is usually
Interest is usually paid periodically, out of the company’s pre-tax income.
The bonds are usually traded on the Stock Exchange but are less liquid than preference or ordinary shares.
The bonds are often convertible into ordinary common shares of the company, with the conversion exchange formula fixed up front.
At liquidation, bond holders get paid ahead of preference shares.