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IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies

Which feature best describes a cumulative redeemable preference share as a hybrid instrument?

A cumulative redeemable preference share pays a fixed preferential dividend, with unpaid amounts carried forward, and is repaid at a set date. This gives it debt-like features, though it ranks behind creditors in liquidation.

  1. AFixed preferential dividend that accrues if unpaid, with repayment at a set date, so it resembles debt while ranking behind creditorsCorrect
  2. BVariable dividend linked to profits and no redemption date, so it resembles ordinary equity
  3. CInterest that is tax-deductible and secured on company assets
  4. DRight to vote on all resolutions equally with ordinary shareholders
  5. Automatic conversion into debentures on a default

Explanation

Cumulative redeemable preference shares carry a fixed dividend, arrears accumulate, and the capital is repaid on a set date, giving debt-like features, yet they rank after creditors and dividends are not a tax-deductible expense.

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