A bond which is issued without a finite maturity period is called perpetual bond. A perpetual bond or promise to pay interest identifitely and there is no contractual obligation to repay the principal. The bond is also called irredeemable which are rarely found in practice.
The value of a perpetual bond with simply equal to the present value of an infinite stream of interest payment (INT) which is discounted at investor’s required rate of return (Kd).
The value of perpetual bond is determined as follow:
Bo = INT/ Kd
For example, A bond of Rs. 1000 par value will pay 7% interest annually into perpetual basis. What would be its value if the required rate of return is 8%.
The present value of a perectual bond of Rs 1000 par value having 7% annual interest payment and 8% discount rate require would be
Bo = INT/ Kd
= 70/0.08
= 875
If required rate of return is 7%, the value of bond will be Rs. 1000 and if it is 9% the value will be 777.78.
Hence, the value of bond will decrease as the required rate of return increased i.e. there is an invest relationship between the value of bond and the required rate of return.
Common Stock:
A common stock is also called ordinary stock or equity stock (Share). The holders of common stock/ share are called stockholders or shareholders which are the legal owners of the company. Common stocks are the source of permanent capital since they do not have a maturity date (Walter, 1999). For the capital contributed by stockholder by purchasing common stocks, they are entitled for dividends. The amount of rate dividend is not fixed because it will be decided by the company’s board of directions. Hence, it is also known as a variable income security. Being the owner of the company, stockholders bear the risk of ownership and they are entitled to dividends after the income claims of others have been satisfied. Similarly, when the company is wound up, they can exercise their claims on asserts after the claims of other suppliers of capital have been met.
Features of common stocks:
Common stocks are supposed to get the payment of dividend and repayment of capital after claims of preferred stock are satisfied hence, common stockholders have an residual ownership claims on their income and assets.
There is no fixed rate of dividend on common stock.
Common stocks have the legal power to elect directions on the board and they are able to control management of the company through their voting rights.
In case of loss, such stocks are normally not paid dividend. So, there are high risk bearing stocks.
Common stock holders are the true ownership of the company but their liability is limited to the amount of their investment in stock (Share).
Preferred Stocks:
Preferred or preference stock is often considered to be a hybrid security since it consists the features of both common stock and debenture (bond) (D. & M., 1999). It is similar to bond, because fixed dividend are paid to preferred stockholders which is similar to common stock. Similarly, dividend to preferred stock is not paid due to insufficient earning which makes it similar to common stocks.
Features of preferred stock:
It is a senior security as compare to common stock. Because it has a prior claims with regards to income and assert. Hence, it is less risky than common stocks.
The dividend rate is fixed and expressed as a percentage of the par value. Hence, it is called fixed - income security due to constant income to investors.
It is hybrid security because it has both features of stock and bond.
It has no voting risk.
Preferred stock and common stock with constant dividend payment are virtually identical:
According to the valuation, the bond may be classified into redeemable and irredeemable bond. The redeemable bond includes regular bonds, zero coupon bonds and floating rate bonds. The irredeemable bond is also called perpetual bond or consol bonds pay fixed coupon each period and par value at the end of term (Albert & Wang, 2003). The zero bonds does not pay interest but sold on discount basis. The floating rate bond pays unequal interest over its life because its coupon is adjusted time to time and it pays par value at the end of its term. In Common stocks are supposed to get the payment of dividend and repayment of capital after claims of preferred stock are satisfied hence, common stockholders have a residual ownership claims on their income and assets. There is no fixed rate of dividend on common stock. But in it is a senior security as compare to common stock. Because it has a prior claims with regards to income and assert. Hence, it is less risky than common stocks. The dividend rate is fixed and expressed as a percentage of the par value. Hence, it is called fixed - income security due to constant income to investors.
References
Albert, S., & Wang, A. (2003). Spe culation duopoly with agreement to disagree: Can overconfidence survive the market test? Journal of Finance 52.
D., J., & M., B. (1999). Improved methods for tests of long - run abnormal stock returns . Journal of Finance 54.
A bond which is issued without a finite maturity period is called perpetual bond. A perpetual bond or promise to pay interest identifitely and there is no contractual obligation to repay the principal. The bond is also called irredeemable which are rarely found in practice.
The value of a perpetual bond with simply equal to the present value of an infinite stream of interest payment (INT) which is discounted at investor’s required rate of return (Kd).
The value of perpetual bond is determined as follow:
Bo = INT/ Kd
For example, A bond of Rs. 1000 par value will pay 7% interest annually into perpetual basis. What would be its value if the required rate of return is 8%.
The present value of a perectual bond of Rs 1000 par value having 7% annual interest payment and 8% discount rate require would be
Bo = INT/ Kd
= 70/0.08
= 875
If required rate of return is 7%, the value of bond will be Rs. 1000 and if it is 9% the value will be 777.78.
Hence, the value of bond will decrease as the required rate of return increased i.e. there is an invest relationship between the value of bond and the required rate of return.
Common Stock:
A common stock is also called ordinary stock or equity stock (Share). The holders of common stock/ share are called stockholders or shareholders which are the legal owners of the company. Common stocks are the source of permanent capital since they do not have a maturity date (Walter, 1999). For the capital contributed by stockholder by purchasing common stocks, they are entitled for dividends. The amount of rate dividend is not fixed because it will be decided by the company’s board of directions. Hence, it is also known as a variable income security. Being the owner of the company, stockholders bear the risk of ownership and they are entitled to dividends after the income claims of others have been satisfied. Similarly, when the company is wound up, they can exercise their claims on asserts after the claims of other suppliers of capital have been met.
Features of common stocks:
Common stocks are supposed to get the payment of dividend and repayment of capital after claims of preferred stock are satisfied hence, common stockholders have an residual ownership claims on their income and assets.
There is no fixed rate of dividend on common stock.
Common stocks have the legal power to elect directions on the board and they are able to control management of the company through their voting rights.
In case of loss, such stocks are normally not paid dividend. So, there are high risk bearing stocks.
Common stock holders are the true ownership of the company but their liability is limited to the amount of their investment in stock (Share).
Preferred Stocks:
Preferred or preference stock is often considered to be a hybrid security since it consists the features of both common stock and debenture (bond) (D. & M., 1999). It is similar to bond, because fixed dividend are paid to preferred stockholders which is similar to common stock. Similarly, dividend to preferred stock is not paid due to insufficient earning which makes it similar to common stocks.
Features of preferred stock:
It is a senior security as compare to common stock. Because it has a prior claims with regards to income and assert. Hence, it is less risky than common stocks.
The dividend rate is fixed and expressed as a percentage of the par value. Hence, it is called fixed - income security due to constant income to investors.
It is hybrid security because it has both features of stock and bond.
It has no voting risk.
Preferred stock and common stock with constant dividend payment are virtually identical:
According to the valuation, the bond may be classified into redeemable and irredeemable bond. The redeemable bond includes regular bonds, zero coupon bonds and floating rate bonds. The irredeemable bond is also called perpetual bond or consol bonds pay fixed coupon each period and par value at the end of term (Albert & Wang, 2003). The zero bonds does not pay interest but sold on discount basis. The floating rate bond pays unequal interest over its life because its coupon is adjusted time to time and it pays par value at the end of its term. In Common stocks are supposed to get the payment of dividend and repayment of capital after claims of preferred stock are satisfied hence, common stockholders have a residual ownership claims on their income and assets. There is no fixed rate of dividend on common stock. But in it is a senior security as compare to common stock. Because it has a prior claims with regards to income and assert. Hence, it is less risky than common stocks. The dividend rate is fixed and expressed as a percentage of the par value. Hence, it is called fixed - income security due to constant income to investors.
References
Albert, S., & Wang, A. (2003). Spe culation duopoly with agreement to disagree: Can overconfidence survive the market test? Journal of Finance 52.
D., J., & M., B. (1999). Improved methods for tests of long - run abnormal stock returns . Journal of Finance 54.
Walter, J. (1999). DIVIDEND POLICIES AND COMMON STOCK PRICES. Wiley Online Library, doi.org/10.1111/j.1540-6261.1956.t....