SIE Exam Question 676: Answer and Explanation

Question: 676

All but which of the following statements are correct regarding bonds and preferred stock?

• A. If a company declares bankruptcy, bondholders are repaid before preferred stock shareholders.
• B. Preferred stocks pay dividends; bonds pay interest.
• C. Bonds are subject to greater interest rate risk than preferred stock.
• D. Neither bond interest nor preferred stock dividends qualify for capital gains treatment.

Correct Answer: C

Explanation:

Preferred stock does not have a fixed maturity date. Therefore, it has unlimited interest rate risk. If a company declares bankruptcy, bondholders are repaid before preferred stock shareholders. Preferred stocks pay dividends; bonds pay interest. Neither bond interest nor preferred stock dividends qualify for capital gains treatment.