S7-Preferred Shares

Why would convertible stock have the greatest price volatility during periods of stable interest rates and increasing stock prices?

Becuase preferred stock is a fixed income security, similar to a bond, where the price of the security moves inversely to interest rate movements. If interest rates are stable, this implies that preferred stock prices will be stable as well. However, convertible preferred stock, if the price of the stock moves up above the conversion price, trades at parity to the equivalent number of common shares into which the preferred stock can be converted. Thus, as the market price of the common stock rises (which has nothing to do with interest rate movements), the price of the preferred will move up as well.

Which statement is BEST regarding participating preferred stock?

The dividend rate is fixed as to minimum but not as to maximum (has a minimum stated rate but depending on good conditions for the company the firm can declare additional dividends which the PARTICIPATING stock can PARTICIPATE in

What is the effect of a anti-dilutive covenant?

Under an "anti-dilutive" covenant, if there is a stock split or stock dividend resulting in the issuance of additional common shares, the conversion price and hence the conversion ratio are adjusted to reflect the fact that the market price of each common share will drop on the ex date.

Preferred stocks are most often suitable investments forwhom?

corporate investor

During a period of stable interest rates, which type of preferred stock would show the greatest price volatility?

participating

If interest rates fall, issuers most likely will call what?

preferred issues with high interest rates AND preferred issues with low call premiums

What is important to remember about preferred shares dividned payments?

They are made semi annually

During periods of stable interest rates and increasing stock prices, which type of preferred stock will have the greatest price volatility?

Convertible

Equities: Preferred Stock: Issuance of Preferred Stock: Dividend Payments

Preferred dividends are stated as a percentage of par value (similar to the interest rate on a bond). Par value for the exam is $100 per share, but companies have issued $25 per share and $50 per share par value preferred stock. Dividends are paid semi-annually (similar to bond interest payments).

Why would participating stock have the greatest price volatility during a period of stable interest rates?

Preferred stock is interest rate sensitive, since it is a fixed income security. As market interest rates rise, preferred stock prices fall. As market interest rates fall, preferred stock prices rise. If market interest rates are stable, preferred stock prices should be stable as well. However, participating preferred stock gives the preferred participation in any "extra" dividends declared by the company to its common shareholders. Thus, the declaration of such an extra dividend would make the preferred stock more valuable and its price would go up in the market - and this did not happen because market interest rates fell.