From an investor's perspective,a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds.However,from a corporate issuer's standpoint,these risk relationships are reversed: bonds are the most risky for the firm,preferred is next,and common is least risky.

Question

Quizplus · Accepted Answer

From an investor's perspective, bonds are considered less risky because they have priority over stocks in case of liquidation and often provide a fixed income. Preferred stocks are riskier than bonds but less risky than common stocks because they typically offer fixed dividends and have priority over common stocks in asset liquidation. However, from a corporate issuer's standpoint, bonds are the most risky because they require fixed interest payments regardless of the company's financial situation, increasing the financial burden. Preferred stocks are next in terms of risk due to dividend obligations, which are typically fixed but can be suspended in financial distress without the company facing bankruptcy. Common stocks are considered the least risky for the issuer since dividends are not obligatory and can be adjusted based on the company's performance.

From an Investor's Perspective,a Firm's Preferred Stock Is Generally Considered