Preferred Stock Flashcards
(23 cards)
A security that acts like a fixed income security, but still allows ownership in the company.
Preferred Stock
Main purpose of a preferred stock.
Fixed Dividend Income.
Who approves the dividends for preferred stocks?
Board of Directors
What is the assumed par value of preferred stock?
$100
Another name for dividend rate.
Coupon
What value is the dividend (coupon) rate based on for preferred stock?
Par value.
Dividend Rate Calculation
Annual Dividend Income / Par Value
What is the current yield?
Tells the real rate of return an investor will receive if bought at market price.
Current Yield Calculation
Annual Dividend Income / Current Market Price
If interest rates rise, what happens to the price of the preferred stock & its yield?
The price trades at a discount and the yield is higher.
If interest rates fall, what happens to the price of the preferred stock & its yield?
The price trades at a premium and the yield is lower.
How can issuers lower the dividend rate and make newly issued preferred stocks more attractive?
By attaching additional features (investor favorable).
What does it mean if an issuer has a cumulative preferred stock?
If the dividend is skipped, the issuer will eventually pay all what’s owed from skipped dividends to current shareholders.
What does it mean if an issuer has a straight preferred stock?
Any skipped dividends will not be repaid.
What are the price and yield characteristics of a cumulative preferred stock?
Usually sell at higher premiums and yields.
If an issuer can “take back” preferred stock, it called a __________ preferred stock.
Callable.
What are 2 reasons an issuer would want to call their preferred stock?
So they don’t have to pay future dividends because the don’t need to. To refinance their preferred stock.
What kind of risks do callable preferred stocks have?
Interest Rate Risk and Reinvestment Risk (worse RoR on a new investment)
How can an issuer make callable preferred stocks more enticing?
Call premiums and call protection.
Call premium.
The amount above par the issuer has to pay to call the stock.
Call Protection
Stocks can’t be called until a specified date.
Arbitrage Opportunity
When an investor buys and sells for an instant profit.
