Preference shares are sometimes regarded as a debt security because:
A) legally preference shares are a debt security.
B) preference share dividend payments like bond interest payments are considered fixed obligations for the company.
C) preference dividends are paid out of before-tax income just like interest payments on bonds.
D) preference shareholders receive a residual value and not a stated value.

Question

Quizplus · Accepted Answer

Preference shares are sometimes regarded as a debt security because the dividend payments to preference shareholders are generally fixed and therefore considered a fixed obligation for the company just like interest payments on bonds. However, legally preference shares are considered equity and not debt securities. The payment of preference dividends is not a legal obligation like bond interest payments, and the payment can be suspended or reduced if a company experiences financial difficulties. Additionally, preference shareholders do not receive a residual value as they rank below debt holders and above equity holders in the event of liquidation.

Preference Shares Are Sometimes Regarded as a Debt Security Because