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I have some problems with understanding a preferred stock and a perpetuity bond. Both have a fixed interest rate and both will never actually repay the notional amount. The only difference, is that one is equity and one is considered a loan.

Therefore, if I understand correctly, if there is no dividend (due to poor performance), a preferred stock will not pay dividend, while the bond will. But other than that, it's the same?

Is this correct? Or am I missing something?

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Some general differences, which may change depending on the certain terms of the instruments:

  • Bondholders get paid in a liquidation before Preferred shareholders (who get paid before common shareholders)
  • Bond interest is taxed as ordinary income, which dividends (if they are qualified) can be taxed at lower rates
  • Missing a preferred dividend is not considered a default, so there is marginally more risk of not getting dividends than coupons

If there is no significant risk of default, analysts will often tread preferred stock as "debt" since it behaves more like debt, regardless of how the company accounts for it. This can effect measurements such as leverage ratio, return on equity, etc.

Note that a company can suspend dividends on its common stock but still pay on preferred stock (but not the other way around).

All tax and legal consequences above are US-centric.

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