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What are the differences between preference shares and bonds?

Modified on: 2018/07/12
A:

Although holders of preference shares and bonds are both entitled to regular distribution payments, preference shares do not have a maturity date and can continue in perpetuity, unlike bonds. Bondholders are entitled to the receipt of regular interest rate payments, while holders of preference shares receive regular dividend payments. Bondholders are creditors of the company, having loaned it money, while holders of preference shares own a piece of the company. Unlike bond payments, which are mandatory, holders of preference shares may miss some dividend payments if the company does not make a profit. If the preference shares are cumulative, the investor is entitled to receive payment for past missed dividends prior to any dividends being paid to common shareholders.

Bonds have fixed maturity and ultimately expire, limiting the amount of interest paid out. Preference shares continue as long as the company is in business. Bondholders, as creditors of the company, have a higher chance of being paid versus holders of preference shares, depending on the priority of the debt. Bonds may be secured by assets of the company. The principal can be paid back to the bondholder by the sale of those assets in case of a bankruptcy. Unsecured bonds are not backed by any assets of the company and have a lower likelihood of receiving any distributions during bankruptcy.

Holders of preference shares, also called preferred shares, receive dividend payments before common shareholders. The amount of the dividend is often fixed. In the case of bankruptcy or dissolution, holders of preference shares have a higher priority over common shareholders in being paid off when the company's assets are liquidated. As a practical matter, preference shareholders are unlikely to receive any money during a bankruptcy dissolution, as they are fairly low on the priority list for repayment.


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