Preferred Stock

Preferred stock has all of the following features EXCEPT: A. Fixed rate of return B. Priority claim to assets upon dissolution compared to common stock C. Priority claim to dividends declared compared to common stock D. Fixed maturity

The best answer is D. Preferred stock has a fixed rate of return (the dividend rate), has priority claim to assets upon dissolution, and has priority claim to dividends if declared by the Board of Directors. Preferred stock does not have a fixed maturity date - it has an indefinite life.

Dividends on preferred stock may be paid in: A. Cash B. Common shares of the same issuer C. Common shares of another issuer D. Preferred stock of the same issuer

The best answer is A. Dividends on preferred stock are paid solely in cash. Dividends on common stock may be paid in cash; stock; stock of another company (such as shares of a subsidiary company) or products of that company.

Which statement is TRUE regarding preferred stock payments? A. Preferred dividends are usually higher than those paid to common B. Preferred dividends tend to grow over time C. Preferred dividends are paid quarterly D. Preferred interest is paid semi-annually

The best answer is A. Preferred dividends are typically fixed and are generally higher than those paid to common stockholders. Preferred dividends (NOT interest) are, in most cases, paid semi-annually, as compared to common stock dividends that are paid quarterly.

Which statement is TRUE when comparing preferred stock to common stock: A. Preferred dividends are paid before common B. Both preferred and common stock has voting rights. C. Preferred shareholders have a junior claim to assets upon liquidation after common shareholders D. Preferred interest is paid semi-annually

The best answer is A. Preferred stock has preference over common as to the payment of dividends and as to assets upon liquidation. Preferred dividends (NOT interest) are, in most cases, paid semi-annually, as compared to common stock dividends that are paid quarterly. Preferred stock lacks voting rights.

All of the following are terms associated with preferred stock EXCEPT: A. renewable B. cumulative C. negotiable D. convertible

The best answer is A. Preferred stock is not a renewable security; there is no stated maturity or redemption date. Preferred stock is a negotiable security, meaning that it is traded. Preferred stock can be callable, cumulative, and convertible.

A customer buys 100 shares of preferred at $51 per share. The par value is $50. The dividend rate is 8%. Each dividend payment would be: A. $200 B. $400 C. $600 D. $800

The best answer is A. The annual rate is 8% x $50 par value = $4 per share x 100 shares = $400. Since preferred dividends are paid semi-annually, each payment is for $200.

ABC 8% $100 par preferred is trading at $105 in the market. The current yield is: A. 6.6% B. 7.6% C. 8.6% D. 10.6%

The best answer is B. The formula for current yield is: $8/$105= 7.6%

Callable preferred stock is likely to be redeemed by the issuer if: A. interest rates rise B. interest rates fall C. the common stock price rises D. the common stock price falls

The best answer is B. If interest rates fall, issuers can "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. Thus, calls take place when interest rates have fallen.

A customer buys 100 shares of preferred at $101 per share. The par value is $100. The dividend rate is 8%. Each dividend payment will be: A. $80 B. $400 C. $800 D. $808

The best answer is B. The annual rate is 8% x $100 par value = $8 per share x the number of shares = $800. Since preferred dividends are paid semi-annually, each payment would be $400.

What type of preferred stock can move in price as the price of the common stock moves? A. Straight preferred B. Cumulative preferred C. Convertible preferred D. Participating preferred

The best answer is C. Convertible securities are convertible into common at a predetermined ratio. If the common stock price rises above the conversion price, then the convertible security will trade at the value of the equivalent number of common shares. For example, assume that $100 par common stock is convertible at $20 per share. If the common stock price moves to $25, the preferred must trade for $125, because it is equivalent to 5 common shares. Cumulative preferred means that if the issuer misses dividend payments, these accumulate and must be paid in full before a common dividend can be paid (all preferred is cumulative). Participating preferred gets to participate with common in any "extra" dividends that are declared by the company Board of Directors.

If interest rates fall, issuers most likely will call: A. all preferred issues B. preferred issues with below market interest rates C. preferred issues with above market interest rates D. only preferred issues with high call premiums

The best answer is C. If interest rates fall, issuers most likely will "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. The "call premium" is any amount that the issuer will pay the preferred stockholder above par value as "extra" compensation for calling in the issue. Issuers are more likely to call in issues with low call premiums (lower extra cost to the issuer) than call in issues with high call premiums (higher extra cost to the issuer).

Which statement is TRUE about preferred stock? A. When interest rates rise, preferred stock prices rise B. Interest rates and preferred prices move in the same direction C. Preferred stock dividends are typically adjusted for interest rate swings D. When interest rates fall, preferred stock prices rise

The best answer is D. Preferred stock is a fixed income security that typically has a fixed dividend. When market interest rates move, the only way for the yield on the security to adjust to the market is to have the price change. When interest rates rise, preferred stock prices fall, increasing the yield on the security; and when interest rates fall, preferred stock prices rise, decreasing the yield on the security. This inverse relationship between rates and price also applies to fixed income securities.

XYZ Company has issued 10%, $100 par cumulative preferred stock. Two years ago, XYZ omitted its preferred dividend. Last year, it paid a preferred dividend of $5 per share. This year, XYZ wishes to pay a common dividend. In order to make the distribution to common shareholders, each preferred share must be paid a dividend of: A. $5 B. $15 C. $20 D. $25

The best answer is D. Since the preferred stock is cumulative, to make a dividend distribution to common shareholders, the company needs to pay all back, unpaid dividends plus this year's dividend (before a common dividend can be paid). The stated dividend rate on the preferred is 10% based on $100 par. Two years ago the entire dividend was omitted, so $10 per share must be paid. Last year, the corporation only paid $5, so there is another $5 that must be paid. Also, this year's dividend of $10 must be paid. The total dividend that must be paid is $25 per preferred share before a common dividend can be paid.

All of the following are types of preferred stock EXCEPT: A. Performance B. Participating C. Cumulative D. Refundable

The best answer is D. There is no such thing as refundable preferred stock. Participating preferred (also known as performance preferred) allows the holder to receive additional dividend distributions from the issuer if the issuer is having a good year. Cumulative preferred "accumulates" any unpaid dividends. Before a common dividend may be paid, all accumulated dividends must be paid to cumulative preferred shareholders.