Series 7 Exam Question 316: Answer and Explanation

Question: 316

Terri Hogan is a customer who wants to invest in securities. Which of the following is most likely to provide Terri with the highest dividend rate?

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

Correct Answer: D

Explanation:

D. The Series 7 examiners want to make sure that you know the difference between the different types of securities. Both convertible preferred and participating preferred stocks tend to carry lower dividend rates because they give Terri an extra benefit, which is the right to convert to common shares at a fixed price or the right to earn more than the stated rate if the issuer has a good year and makes an extra dividend payment. Straight preferred stock has no conversion or participating features and probably carries a better rate than convertible and participating stocks. Choice (D) is the correct answer, however, callable preferred stock allows the issuer to "call" the securities away from Terri; therefore, callable preferred stock tends to pay higher rates than any of the other answer choices to offset this call risk.