1. Why do callable bonds typically have a higher yield to maturity than noncallable bonds, holding all other things constant? Is the yield differential between callable and noncallable bonds likely to be constant over time? Why?

2. Because the dividend payments on preferred stock are not a tax-deductible expense, the explicit cost of this form of financing is high. What are some of the offsetting advantages to the issuing firm and to the investor that enable this type of security to be sold?

3. The common stockholder is considered the residual owner of a corporation. What does this mean in terms of risk and return?