SIE Understanding Products and Their Risks Question 36: Answer and Explanation

Question: 36

Which of the following is true?

• A. Preferred shareholders typically are most interested in prospects of growth in share value.
• B. Bondholders typically are most interested in prospects of interest rates decreasing.
• C. Common shareholders typically are not interested in prospects of growth in share value.
• D. Creditors are typically not interested in the financial strength of the company.

Correct Answer: B

Explanation:

B: Choice B is correct because bondholders expect to see the market value of bonds rise when interest rates decline. Choice A is incorrect because preferred shareholders are typically focused on dividends and preference in the event of liquidation. Choice C is incorrect because an attraction of common stock is increase in the market value as bond holders and preferred stockholders have limited claims on the value of the company. As the company grows, common shareholders have claims on the increase of market capitalization value. Choice D is not true because creditors depend upon the financial strength of the company to enable it to make payments when due.