Securities Industry Essentials Exam
Par Value
AKA Face Value Typically $100 for preferred stock Never Fluctuates Dividend rate based on Par
Dividend Rate
Always Based on Par Never Changes
callable preferred stock
Callable preferred shares can be "taken back" by the issuer. Allows the issuer to end an investment by paying stockholders a specified amount
Dividend Rate Formula
Dividend Annual Income / Par
Current Yield Formula
Dividend annual income / Market Price
Preferred Stock Characteristics
Form of ownership (equity) Market prices are heavily influenced by interest rates and do not have as much fluctuation as common stock prices
Redeemed (called)
Occurs when an issuer takes back outstanding securities from investors in return for payment of some form. Issuers call their preferred stock for two reasons: 1. The issuer can avoid making future dividend payments if they have the necessary funds (why not pay it off if you can) This is similar to paying off an outstanding loan early if you have enough money in savings 2. The issuer can "refinance" their preferred stock
Preferred Stock Dividends
Paid on a semi-annual basis
Convertible Preferred Stock
Preferred stock with an option to exchange it for common stock at a specified rate.
Participating Preferred Stock
Stock that allows the preferred stockholder to participate in the profits of the corporation along with the common stockholders.
Call Premiums
The amount above par an issuer may obligate itself to pay when calling shares.
Yield
The rate of return an income-producing security provides. While the dividend rate is based on the unchanging par value, yield is based on the fluctuating market price. Yield specifically factors in the price paid for the investment, while the dividend rate does not. Comparing the dividend rate to the dividend yield, the yield is a more accurate representation of an investor's return. - Represents overall rate of return - Based on market price and dividend rate - Continually fluctuates - Yield and Market Prices are inverses Low Market Price = High Yield
Call Protection
The time during which the issuer of the bond is not allowed to exercise the call option.
arbitrage opportunity
any situation in which it is possible to make a profit without taking any risk or making any investment
Straight (non-cumulative)
issuer will not make up skipped dividends
Cumulative
the issuer must pay missed dividends to preferred stockholders at some point