Preferred stock frequently combines characteristics of bonds and common stock.
A component of share capital known as preferred stock is often regarded as a hybrid instrument since it might have any combination of characteristics that common stock does not, including characteristics of both an equity and a debt instrument. Preferred stocks can take precedence over ordinary stock in the payment of dividends and upon liquidation, but they are junior to bonds in terms of claim compared to common stock. The articles of association or articles of incorporation of the issuing firm provide information about the preferred stock's terms. The same big credit rating firms that rate bonds also rate preferred stocks. Because preferred dividends do not carry the same assurances as interest payments from bonds, and because preferred-stock holders' claims are not as well-protected as bondholders', their ratings are often lower than those of bonds.
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