Floating-rate preferred stock is a type of preferred stock that pays dividends based on a floating interest rate. The dividend rate is typically tied to a benchmark interest rate, such as the London Interbank Offered Rate (LIBOR), and adjusts periodically to reflect changes in the benchmark rate. This feature protects investors against rising interest rates, as the dividend payments will increase when interest rates rise. However, it also exposes investors to the risk of declining dividend payments when interest rates fall.
Which of the following best describes floating rate preferred stock?
Not Correct
Correct!
Select an option above to see an explanation here.
A) Fixed-rate preferred stock has a fixed dividend rate, not a floating rate. B) Floating rate preferred stock has a dividend rate tied to a benchmark interest rate, such as LIBOR. C) Convertible preferred stock can be converted into common stock unrelated to the dividend rate. D) Adjustable rate preferred stock has a dividend rate adjusted periodically but not necessarily tied to a benchmark interest rate.
What is the primary benefit of investing in floating rate preferred stock?
A) Floating rate preferred stock protects rising interest rates, as the dividend payments will increase when interest rates rise. B) Fixed dividend payments are a feature of fixed-rate preferred stock, not floating-rate preferred stock. C) The ability to convert preferred stock into common stock is a feature of convertible preferred stock, not floating-rate preferred stock. D) Floating-rate preferred stock may still have interest rate risk, but the primary benefit is protection against rising interest rates.
Which of the following is a risk associated with investing in floating rate preferred stock?
A) A risk of investing in floating-rate preferred stock is declining dividend payments when interest rates fall. B) The inability to convert preferred stock into common stock is not a risk specific to floating-rate preferred stock. C) Guaranteed fixed dividend payments are a feature of fixed-rate preferred stock, not a risk of floating-rate preferred stock. D) Lower interest rate risk compared to fixed-rate preferred stock is not a risk associated with investing in floating-rate preferred stock.
In the early 2000s, a large corporation issued floating-rate preferred stock with a dividend rate tied to LIBOR. As interest rates rose during this period, investors in the floating-rate preferred stock benefited from increasing dividend payments. However, when interest rates began to decline in the late 2000s, the dividend payments on the floating-rate preferred stock also decreased, resulting in lower income for investors.
Become a Pro Member to see more questions
Example Series 65 Example Practice Question
A utility company issues floating-rate preferred stock with a dividend rate tied to LIBOR. When LIBOR increases, the dividend payments on the floating rate preferred stock increase, providing investors with higher income. Conversely, when LIBOR decreases, the dividend payments on the floating rate preferred stock decrease, resulting in lower income for investors.
When rates are floating, dividends cope, tied to LIBOR, they rise and they slope.
- *Floating-rate preferred stock*: A type of preferred stock that pays dividends based on a variable interest rate, which is typically tied to a benchmark rate such as LIBOR or the U.S. Treasury rate.
- *Floating-rate preferred stock example*: ABC Corporation issues floating-rate preferred stock with a dividend rate tied to the 3-month LIBOR rate plus 2%. If the 3-month LIBOR rate is 1%, the dividend rate for the floating-rate preferred stock would be 3% (1% + 2%).