Unit 2 Flashcards
How often does preferred stock make dividends?
Semi-anually
What is a preferred stock’s dividend rate based upon?
Its Par Value
Why is preferred stock fixed?
Because regardless of how the market price fluctuates, it always pays the percentage of the par value on original offering
What is the yield?
The rate of return an income-producing securities provides
What is the yield if an investor purchases a 5% 100 par stock in the secondary market at 80 bucks?
5 dollars/80 dollars (the market price)
What’s the difference between the dividend and the yield?
Dividend never changes from original par, yield fluctuates depending on market price
The ____ the preferred stock market price, the ___ the yield
Higher, lower
Why does the percentage rate of return decrease the more they pay for the stock?
Because it’s the proportion between how much the par value was giving divided by the current market price
What does it mean if a preferred stock is selling at a discount?
That the stock is trading lower than the price at par
What does it mean if a preferred stock is selling at a premium?
That it is trading at higher than it’s original par value
When is a stock trading at discount?
When the yield (percent) is higher than the dividend rate
When is a stock trading at a premium?
When the yield (percent) is lower than the dividend rate
What influences the demand for preferred stock?
Interest rate changes
3 reasons the economy thrive when interest rates are low
- More goods purchased
- Business profitability rises
- Government can spend less
Why do preferred stock dividend rates tend to be higher than bond interest rates?
Because preferred stock is riskier because dividends are subject to BOD approval
At what dividend rate are preferred stocks usually pared and why?
The current interest rates because they are competing with the investors of bonds
What happens to preferred stock if interest rates rise?
They are no longer as valuable because someone can buy a new bond/preferred stock with a higher interest rate now
How can you mitigate the drop in value of preferred stock due to interest rates?
Lower the market price of the stock so that the percent yield is higher
How can an investor increase their overall return on preferred stock with interest rates?
If the interest rates drop, they can higher the market price to create a yield better than the current interest rate. It is now sold for more than it is bought
When are preferred stock redeemable?
If issued with a call feature and it is exercised
What happens when an issue is called
The issuer forcibly redeems (buys back) the security for a specified price
Two reasons preferred stock value falls?
- Interest rates
- Issuer’s financial status declines
What is the difference between cumulative and straight preferred stock?
Cumulative, the issuer must pay missed dividends to preferred stockholders at some point. Straight, the issuer does not have to make up.
