Preferred Stock & Yield — Q&A

Treated as a fixed income security because it pays a fixed dividend rate set at primary-market issuance. Main investor benefit is cash dividends, not capital appreciation.

$100 par: $5/share, $500 total (Par × rate). $25 par: $1.25/share, $125 total. Formula: Annual dividend = Par × dividend rate. Assume $100 par on exam only when unstated.

Dividend rate (DR) = $5/$100 = 5% — fixed, based on par, never changes. Current yield (CY) = $5/$95 = 5.26% — based on market price paid. CY = annual income ÷ market price.

Discount (below par): yield > dividend rate. Par: yield = dividend rate. Premium (above par): yield < dividend rate. Higher price → lower yield (inverse relationship).

Market price falls (less attractive vs. new 7% issues); yield rises to compete (e.g., $70 price → CY = $5/$70 = 7.14%). Fixed income values fall when rates rise.

Fixed-rate: dividend fixed for life; more sensitive to interest rate changes. Floating-rate (ARPS): dividend resets periodically with a benchmark (e.g., SOFR); less price volatility, price stays closer to par.

The BOD must approve each dividend. Dividends are not a legal obligation — BOD can skip or delay indefinitely if funds are insufficient (key investor risk).

Same as common stock: regular way = T+1; cash settlement = same day if before 2:30pm ET.