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