Understanding Rate of Return and Yield in Investments

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What is the rate of return known as in the context of preferred stock?

Market yield (correct)

Funding rate

Dividend rate

Conversion premium

How is the dividend yield calculated?

Dividend price / Stock price (correct)

Stock price - Dividend price

Stock price / Dividend price

Dividend price + Stock price

What does the conversion premium of a convertible preferred stock indicate?

The premium paid to acquire convertible preferred stock

The cost of converting preferred shares to common shares

The market yield difference between preferred and common shares

The premium above the common share value for converting preferred shares (correct)

In payback calculation, what does the term 'payback' refer to?

Time taken for dividends to pay back the initial investment Signup and view all the answers

If Company X has a dividend yield of 8% and Company Y has a dividend yield of 10%, what can you infer about the two companies?

Insufficient information to compare Signup and view all the answers

What does a higher dividend yield indicate about a stock?

Lower risk Signup and view all the answers

How is the formula for calculating payback defined?

Premium percentage divided by preferred yield minus common yield Signup and view all the answers

In the context of retractable preferreds, how is the yield calculated when the price is greater than the retraction price?

Dividend divided by price Signup and view all the answers

What happens to the retractable preferreds when the price is less than the retraction price?

They are sold back to the issuer Signup and view all the answers

How are variable or floating rate preferred dividends affected?

They increase as interest rates increase Signup and view all the answers

What characterizes deferred preferreds?

Dividends are not paid until a specific maturity date Signup and view all the answers

What distinguishes callable preferreds from regular preferreds?

They can be bought back by issuers at a premium over par value Signup and view all the answers

What distinguishes preferred shares from common shares in terms of dividend payments?

Preferred dividends must be paid before common dividends can occur. Signup and view all the answers

Which type of preferred shares may not have a maturity date like a bond?

Fixed-rate (straight) Preferreds Signup and view all the answers

What is the formula for pricing preferred dividends in perpetuity?

$PV0 = C/r Signup and view all the answers

Why do investors receive dividend tax credit when investing in preferred shares?

To reduce the tax paid compared to receiving interest income. Signup and view all the answers

What aspect of a preferred share limits the opportunity for price increase compared to common shares?

Preference in dividend payments Signup and view all the answers

Why are preferred dividends primarily considered fixed income investments?

Because they have a stated par value and fixed dividend amount. Signup and view all the answers