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What is a key characteristic of preferred stock that differentiates it from common stock?
What is a key characteristic of preferred stock that differentiates it from common stock?
What is the assumed par value for preferred stock in test questions?
What is the assumed par value for preferred stock in test questions?
How often do preferred stock dividends typically get paid?
How often do preferred stock dividends typically get paid?
What determines the amount of dividends paid to investors in preferred stock?
What determines the amount of dividends paid to investors in preferred stock?
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What happens to dividends if the Board of Directors does not approve the payment for preferred stock?
What happens to dividends if the Board of Directors does not approve the payment for preferred stock?
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What is the significance of par value in preferred stock?
What is the significance of par value in preferred stock?
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If a company issues a preferred stock with a par value of $100 and a 5% dividend rate, how much will investors receive annually?
If a company issues a preferred stock with a par value of $100 and a 5% dividend rate, how much will investors receive annually?
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Which of the following statements is true regarding preferred stock?
Which of the following statements is true regarding preferred stock?
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What happens to the yield of preferred stock when its market price increases?
What happens to the yield of preferred stock when its market price increases?
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What effect do rising interest rates have on the market prices of fixed income securities?
What effect do rising interest rates have on the market prices of fixed income securities?
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Which of the following statements about preferred stock dividends is true?
Which of the following statements about preferred stock dividends is true?
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Preferred stock typically has a par value of which amount?
Preferred stock typically has a par value of which amount?
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What characterizes the relationship between yield and market price in preferred stocks?
What characterizes the relationship between yield and market price in preferred stocks?
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How are market price and interest rates related concerning preferred stock?
How are market price and interest rates related concerning preferred stock?
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What is the most significant factor that influences the market prices of preferred stocks?
What is the most significant factor that influences the market prices of preferred stocks?
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What typically happens to inflation when interest rates are low for an extended period?
What typically happens to inflation when interest rates are low for an extended period?
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Which of the following is a consequence of hyperinflation?
Which of the following is a consequence of hyperinflation?
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What action does the Federal Reserve typically take when inflation rates are high?
What action does the Federal Reserve typically take when inflation rates are high?
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In what situation would a 5% preferred stock become less valuable?
In what situation would a 5% preferred stock become less valuable?
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How does the market price of preferred stock typically respond when interest rates rise?
How does the market price of preferred stock typically respond when interest rates rise?
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What is the likely yield of a preferred stock selling for $70 that has a $5 annual income?
What is the likely yield of a preferred stock selling for $70 that has a $5 annual income?
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What is a key difference between preferred stock and bonds?
What is a key difference between preferred stock and bonds?
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What typically happens to the value of a preferred stock when interest rates fall?
What typically happens to the value of a preferred stock when interest rates fall?
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When an investor lowers the price of their 5% preferred stock to sell it, what happens to its yield?
When an investor lowers the price of their 5% preferred stock to sell it, what happens to its yield?
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Why might investors prefer bonds over preferred stock when interest rates rise above the preferred stock dividend rate?
Why might investors prefer bonds over preferred stock when interest rates rise above the preferred stock dividend rate?
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What was Zimbabwe's inflation rate in 2008 that exemplified hyperinflation?
What was Zimbabwe's inflation rate in 2008 that exemplified hyperinflation?
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What must preferred stock dividend rates do to remain attractive to investors?
What must preferred stock dividend rates do to remain attractive to investors?
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What is a common misconception about preferred stock dividends?
What is a common misconception about preferred stock dividends?
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Why is it important for investors to pay attention to interest rate fluctuations?
Why is it important for investors to pay attention to interest rate fluctuations?
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What does the fixed dividend rate of preferred stock depend on?
What does the fixed dividend rate of preferred stock depend on?
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Which of the following statements about current yield is true?
Which of the following statements about current yield is true?
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If a preferred stock is trading at a premium, what is true about its yield?
If a preferred stock is trading at a premium, what is true about its yield?
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In a scenario where an investor pays $80 for a preferred stock with a $100 par value and a 5% dividend rate, what is their current yield?
In a scenario where an investor pays $80 for a preferred stock with a $100 par value and a 5% dividend rate, what is their current yield?
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What primarily influences the market price of preferred stock?
What primarily influences the market price of preferred stock?
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If the market price of a preferred stock rises above its par value, what happens to the yield?
If the market price of a preferred stock rises above its par value, what happens to the yield?
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When a preferred stock trades at par, what is the relationship between the yield and the dividend rate?
When a preferred stock trades at par, what is the relationship between the yield and the dividend rate?
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What is a characteristic of preferred stock concerning dividend payments?
What is a characteristic of preferred stock concerning dividend payments?
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In terms of yield, what does it mean if preferred stock is selling at a discount?
In terms of yield, what does it mean if preferred stock is selling at a discount?
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What does an investor need to calculate the current yield of a preferred stock?
What does an investor need to calculate the current yield of a preferred stock?
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Why are preferred stocks particularly sensitive to changes in interest rates?
Why are preferred stocks particularly sensitive to changes in interest rates?
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What is the consequence of low-interest rates on the economy?
What is the consequence of low-interest rates on the economy?
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In what situation would a company's preferred stock likely trade at a premium?
In what situation would a company's preferred stock likely trade at a premium?
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What happens to preferred stocks' payment if the issuer does not generate enough profit?
What happens to preferred stocks' payment if the issuer does not generate enough profit?
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Study Notes
Preferred Stock Fundamentals
- Preferred stock is an equity security acting like a fixed-income security, characterized by fixed dividend payments. Common stock dividends fluctuate, while preferred stock dividends remain consistent. All companies offering preferred stock pay cash dividends.
- Dividend payments are typically made quarterly, although annual or semi-annual options exist. The Board of Directors (BOD) approves these payments.
Par Value
- Par value (or face value) is crucial for fixed-income securities. It's the initial price of the preferred stock.
- Par value is typically $100, but can vary by issuer.
- Par value determines the dividend paid.
- The dividend rate, sometimes referred to as the "coupon," is a fixed percentage of the par value. E.g., a 5% dividend rate on 100parvaluepays100 par value pays 100parvaluepays5 annual dividends.
- Dividends are paid quarterly.
- Preferred stock is usually issued at par in the primary market, then trades in the secondary market with prices influenced by demand. The par value and dividend rate stay the same regardless of secondary market price.
- The issuer's profitability impacts the secondary market price. Lower profitability means lower dividend payments, thus a lower value.
Yield
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Yield represents the return on a preferred stock. It is based on both, dividend rate and price paid in the secondary market.
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The dividend rate is always based on the par value, while the yield is based on the market price. This means yield fluctuates, while dividend rate remains constant.
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Formula: (Current Yield = \frac{Annual Income}{Market Price})
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A lower price in the secondary market results in a higher yield. A higher price leads to a lower yield.
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If the stock trades at a discount (market price is below par), the yield is greater than the dividend rate.
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If the stock trades at a premium (market price above par), the yield is smaller than the dividend rate.
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The current yield is the primary method investors measure return.
Market and Interest Rates
- Preferred stock market prices are greatly affected by interest rates. Higher interest rates decrease the value of existing preferred stock. Conversely, falling interest rates increase the value of existing preferred stock.
- Investors compare preferred stocks to bonds with similar qualities. If bonds pay a better interest rate, preferred stock becomes less attractive.
- A preferred stock's dividend rate must be competitive relative to current interest rates for investors to consider it. Dividends from preferred stock are not guaranteed obligations.
- New issuance of preferred stock is influenced by current interest rates, with dividend rates often mirroring them. If interest rates rise, the existing preferred stock becomes relatively less attractive than newly issued bonds or preferred stock.
- If interest rates fall, the existing preferred stock becomes relatively more attractive than newly issued bonds or preferred stock.
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Description
Explore the basics of preferred stock, including its unique characteristics and how dividend payments work. Understand the important concept of par value and its impact on dividends. This quiz will ensure you grasp the fundamental aspects of preferred equity securities.
