Series 7 Exam Question 15: Answer and Explanation

Question: 15

Which of the following types of preferred stock would most likely have the highest dividend?

• A. Participating preferred
• B. Callable preferred
• C. Convertible preferred
• D. Senior preferred

Correct Answer: B

Explanation:

B. Out of the choices listed, callable preferred stock would most likely have the highest dividend because the issuer has the right to call back the preferred stock from the holders. Obviously, this is not advantageous to the holders because the issuer would most likely call the stock when interest rates decrease. Thus, investors would likely have to invest in preferred stock with a lower dividend. Since it's a disadvantage to holders of callable preferred stockholders, the issuer has to offer a higher dividend to entice investors.