2.2 Tvpes of security We mentioned in Section I that originally in MBa programs corporate finance was taught as a law subject. Nowadays law has been deemphasized but a knowledge of the different types of security that are used and the legal rights of the owners is very important The basic types are outlined below. You should read Chapter 14 in Brealey and Myers to obtain a more detailed knowledge Common Stock The common stockholders are the owners of the corporation. they therefore have a general preemptive right to anything of value that the company may wish to distribute. They also have the ultimate control of the company's affairs. In practice this control is limited to a right to vote either in person, or by proxy, on appointments to the board of directors Long Term Debt and Preferred Stock Long term debt and preferred stock are fixed income securities in that they both provide the investor with a stipulated promised series of payments in the future. The interest and face value are specified for the bonds, and a given dividend rate is stipulated for the preferred stock. The firm must pay the interest and the maturity values on its debt as agreed upon in the original debt contract or the company defaults and is subject to legal action. Junk bonds are high yield bonds With preferred stock the firm promises to pay dividends on the preferred stock. If it fails to it is not bankrupt, however. It cannot pay dividends to common stockholders until the dividends to preferred stock are paid. Bondholders have a prior claim to the company's7 2.2 Types of Security We mentioned in Section 1 that originally in MBA programs corporate finance was taught as a law subject. Nowadays law has been deemphasized but a knowledge of the different types of security that are used and the legal rights of the owners is very important. The basic types are outlined below. You should read Chapter 14 in Brealey and Myers to obtain a more detailed knowledge. Common Stock The common stockholders are the owners of the corporation. They therefore have a general preemptive right to anything of value that the company may wish to distribute. They also have the ultimate control of the company's affairs. In practice this control is limited to a right to vote either in person, or by proxy, on appointments to the board of directors. Long Term Debt and Preferred Stock Long term debt and preferred stock are fixed income securities in that they both provide the investor with a stipulated promised series of payments in the future. The interest and face value are specified for the bonds, and a given dividend rate is stipulated for the preferred stock. The firm must pay the interest and the maturity values on its debt as agreed upon in the original debt contract or the company defaults and is subject to legal action. Junk bonds are high yield bonds. With preferred stock the firm promises to pay dividends on the preferred stock. If it fails to it is not bankrupt, however. It cannot pay dividends to common stockholders until the dividends to preferred stock are paid. Bondholders have a prior claim to the company's