This risk is called interest rate risk. The expected value of a bond can change if the uncertainty of interest and principal payments change. A call provision gives the firms an option of calling the bond before its maturity by buying the bond back. The terminal value consists of the repayment of principal and the interest on principal and reinvested interest. If the firm is liquidated, they share proportionately after the claimants with higher legal priority are paid.
Preferred stock has features of both bonds and common stock.
Unlike a bond, the cash flows for common stockholders are not explicitly promised and not confined to a finite time period. The change in price from P 0 to P n is called the capital gain or loss. Earnings can be paid out in dividends or retained by the firm to finance ongoing productive activities. 154-156 for more details. Another constraint or limitation is involves the cost of obtaining information.