Understanding Rate of Return and Yield in Investments
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Questions and Answers

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?

    <p>Time taken for dividends to pay back the initial investment</p> 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?

    <p>Insufficient information to compare</p> Signup and view all the answers

    What does a higher dividend yield indicate about a stock?

    <p>Lower risk</p> Signup and view all the answers

    How is the formula for calculating payback defined?

    <p>Premium percentage divided by preferred yield minus common yield</p> 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?

    <p>Dividend divided by price</p> Signup and view all the answers

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

    <p>They are sold back to the issuer</p> Signup and view all the answers

    How are variable or floating rate preferred dividends affected?

    <p>They increase as interest rates increase</p> Signup and view all the answers

    What characterizes deferred preferreds?

    <p>Dividends are not paid until a specific maturity date</p> Signup and view all the answers

    What distinguishes callable preferreds from regular preferreds?

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

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

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

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

    <p>Fixed-rate (straight) Preferreds</p> Signup and view all the answers

    What is the formula for pricing preferred dividends in perpetuity?

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

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

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

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

    <p>Preference in dividend payments</p> Signup and view all the answers

    Why are preferred dividends primarily considered fixed income investments?

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

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