1.3.2 - CATEGORIES OF PREFERRED STOCK

Which type of preferred stock typically has the highest stated rate of dividend, all other factors equal? Callable or Straight

- Callable preferred. When the stock is called, dividend payments are no longer made. To compensate for that possibility, the issuer pays a higher dividend.

Of straight and cumulative preferred, which would you expect to have the higher stated rate?

- Straight preferred. Cumulative preferred is safer, and there is always a risk/reward trade-off. Because straight preferred has no special features, it will pay a higher stated rate of dividend.

What is a callable, or redeemable, preferred stock?

A company can buy back from investors at a stated price after a specified date. The right to call the stock allows the company to replace a relatively high fixed dividend obligations with a lower one.

A company that has issued cumulative preferred stock: A) pays past and current preferred dividends before paying dividends on common stock. B) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends. C) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common. D) pays the preferred dividend before paying the coupons due on its outstanding bonds.

A) pays past and current preferred dividends before paying dividends on common stock. Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest is always paid before dividends. Dividends in arrears on cumulative preferred have the highest priority of dividends to be paid. Reference: 1.3.2.2 in the License Exam Manual

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

A) rise. Preferred stock is interest rate sensitive. As rates fall, prices of preferred stocks tend to rise, and vice versa. Reference: 1.3.2.1 in the License Exam Manual

Which of the following securities typically carries the highest dividend rate? A) Convertible preferred. B) Callable preferred. C) Straight preferred. D) Participating preferred.

B) Callable preferred. Straight preferred is the benchmark rate. As the name suggests, there are no conversion or participating features. Compared to straight preferred, both convertible and participating preferred tend to carry lower dividend rates, as the investor has been given something extra-the right to convert into common shares at a fixed price or the right to earn more than the stated rate if the issuer has a good year and the board of directors elects to make an additional dividend payment. Callable preferred allows the issuer to call the securities away from the investor. From an investor's point of view, this is not an incentive. Therefore, callable preferred tends to pay higher rates. Reference: 1.3.2.3 in the License Exam Manual

What is another word for redeemable?

Callable

TRUE OR FALSE? Straight preferred stock is cumulative.

FALSE Straight preferred stock is NONcumulative.

TRUE OR FALSE? When a corporation calls a preferred stock, dividend payments and conversion rights generally cease after the call date.

FALSE The payments and conversion rights generally cease ON the call date.

A preferred stock is convertible if the owner can ________________

If the owner can exchange each preferred share for shares of common stock.

What is cumulative preferred stock?

Is when stockholders of cumulative preferred stock receive their current dividends plus the total accumulated dividends - dividends in arrears - before any dividends may be distributed to common stockholders.

What is straight preferred stock?

Is when stockholders of preferred stock have no special features beyond the stated dividend payment. Missed dividends are not paid to the holder.

What is another word for callable?

Redeemable

If all other factors are equal, an investor would expect which type of preferred stock to pay the highest stated dividend rate? A) Cumulative. B) Callable. C) Straight. D) Convertible.

B) Callable. When the stock is called, dividend payments are no longer made. With callable preferred stock, to compensate for that possibility, the issuer pays a higher dividend than with straight preferred. Cumulative and convertible preferred have positive characteristics that would justify a lower fixed dividend than straight. Reference: 1.3.2.5 in the License Exam Manual

Which of the following features of preferred stock allows the holder to reduce the risk of inflation? A) Cumulative. B) Convertible. C) Callable. D) Noncumulative.

B) Convertible. Fixed dollar investments such as bonds and preferred stock are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less over time in terms of purchasing power. The ability to convert to common stock, which tends to keep pace with inflation, offsets this risk. Reference: 1.3.2.3 in the License Exam Manual

Which stock is safer for a stockholder, straight preferred or cumulative preferred.

Cumulative preferred

How are participation preferred stock profits shared?

In addition to fixed dividends, participating preferred stock offers its owners a share of corporate profits that remain after all dividends and interest due other securities are paid.