Why is preferred stock often called a hybrid between bonds and common stock?
Preferred stock is often considered a hybrid between bonds and common stock because it contains a mixture of many of the characteristics of each. Among the examples given in the chapter:
(1) Like a bond: preferred stock has a face or maturity or par value, it pays its holder a fixed amount each year, it normally has no voting privileges, it has priority above common stock in liquidation, it may contain a call feature or be convertible to common stock, the issue may require a sinking fund for its retirement, and it may contain indenture provisions.
(2) Like common stock: preferred stock normally does not have a fixed maturity, it pays a dividend, it may contain voting power, it has priority after all debt in liquidation, and dividends may adjust with the company’s income.