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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

One often finds that a company’s bonds have a higher yield than its preferred stock, even though an investor considers the bonds to be less risky titan the preferred. What causes this yield differential?

Summary Introduction

To Determine: The causes of yield differential.

Introduction: Preferred stock is a category of corporate shares that are independent from common stock and have particular rights that are not accessible to common shareholders. Furthermore, similar to common stock, preferred stock can be purchased and sold through a merchant.

Explanation

The causes of yield differential is as follows:

  • If the dividends received from the preferred stock and interest which are received from securities (bonds) were taxed in a similar way, the bonds may possibly contain a lesser yield rate.
  • Organizations characterize the primary investor member that holds preferred stock...

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