Natchie Digal BSA – 1

ACC 103D Financial Markets

Conceptual Activity No. 2: Capital Markets

Bonds Ordinary Shares Preferred Shares

A.) Ownership and Limited rights under Belongs to common Limited rights when
Control of the firm default in interest stockholders through dividends are missed
payment. voting rights and
residual claim to
Bonds do not alter the income. Preferred stockholders
ownership structure. usually have no or
An investor who buys a An ordinary share limited, voting rights in
corporate bond is represents a fraction of corporate governance.
loaning money to the ownership in the
company and they do corporation that issues
not become a part it. As an owner, the
owner of the company. shareholder gets a vote
in the company's major
decisions, decided at
its shareholder
meetings. For each
share of common stock
owned, the stockholder
gets one vote, so the
stockholder's opinion
becomes weightier
when they own more
shares.
B.) Obligation to Contractual obligation None Must receive payment
provide return to pay interest to its before common
bondholders on a Shareholders do expect stockholders
regular basis. returns on their
investments, either Preferred shareholders
through stock growth have a priority in
or dividend payments. dividend payments
But the company over the holders of the
always has the option common stock. If a
to repurchase some or preferred share has
all of its outstanding cumulative dividends,
shares if and when it then it contains the
no longer has need of provision that should a
equity capital, thereby company fail to pay out
consolidating dividends at any time
ownership and at the stated rate, then
increasing the value of the issuer will have to
shares still available by make up for it as time
 reducing the supply. goes on.
C.) Claims to the asset Highest claim Lowest claim of any Bondholders and
in the event of security holder creditors must be
bankruptcy In bankruptcy, the satisfied first
bondholders have a In the event of
liquidation preference bankruptcy, common If the company enters
over investors with stock investors receive bankruptcy, preferred
ownership or the any remaining funds stockholders are
shareholders. after bondholders, entitled to be paid
creditors (including from company assets
employees), and before common
preferred stock holders stockholders.
are paid.

D.) Tax Obligation of Tax deductible Not deductible Not deductible

the corporation Cost = Interest
payment x (1-Tax rate)

E.) Tax Obligation of Municipal bond 70 % of dividend to Same as common stock

the recipient of interest is tax-exempt another corporation is
income tax-attempt