5.2 Preferred Stock

All of the following are features of preferred stock EXCEPT: A) priority claim to assets at the dissolution of a corporation. B) typically no voting rights. C) fixed maturity. D) fixed rate of return.

C) fixed maturity. *Preferred stock has no stated maturity. However, it does have a stated rate of return due to its fixed dividend and has priority over common stock in the liquidation of a corporation. Generally, preferred stock does not have voting rights.

When analyzing a preferred stock, an investment adviser would give the most credence to: A) earnings per share. B) book value per share. C) the ability of the company to pay the stated dividend. D) the company's short-term debt obligations.

C) the ability of the company to pay the stated dividend. *Preferred stock is purchased primarily as an income security based on its fixed dividend. Therefore, any analysis would tend to place the ability of the issuer to meet that dividend paramount. Earnings per share and book value per share are computations relevant to common stock only.

Equity ownership of a corporation is split into two types which are commonly referred to as: A) stocks and bonds. B) preferred stocks and bonds. C) common stocks and convertible bonds. D) common stocks and preferred stocks.

D) common stocks and preferred stocks. Equity ownership comes with two types of securities: common and preferred stocks.

As interest rates fall, prices of straight preferred stock will: A) fall. B) remain unaffected. C) become volatile. D) rise.

D) rise. *Preferred stock is interest rate sensitive. As rates fall, prices of preferred stocks tend to rise, and vice versa.

A similarity between common and preferred stock is: A) the dividend is fixed. B) they have an equal vote. C) both are evidence of corporate indebtedness. D) the dividend must be declared by the board of directors.

D) the dividend must be declared by the board of directors. *All dividends, both common and preferred, must be declared by the board of directors. Preferred shares usually have a fixed dividend rate and usually have no (or very limited) voting powers. Both types of stock are equity, not debt, securities.

If interest rates are increasing and the market prices of bonds are decreasing, what happens to the value of straight preferred stock during this period? A) Its value decreases. B) Its value increases. C) Its value remains the same. D) Interest rates and the price of bonds have no impact on the value of stock.

A) Its value decreases. Preferred stocks are interest-rate sensitive, as are other fixed- income investment securities, such as bonds. Thus, if interest rates increase, the fixed return may be surpassed by the return provided by other investments. The value of preferred stock will thus decrease when interest rates rise.

A change in interest rates will have the most immediate impact upon: A) preferred stock. B) common stock. C) ETFs. D) REITs.

A) preferred stock. *Interest rate risk is predominately found with fixed income investments. Preferred stock with its fixed dividend, will be impacted by changes in the cost of money. Of course, you might challenge this answer claiming that if the ETF was based on a long-term bond index, that could certainly be the correct choice. But, unless specified, assume all ETFs are equity based.