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Series 7 practice questionmediumEquity Securities — Preferred Stock — Interest Rate Sensitivity

When market interest rates rise, the market price of preferred stock will most likely:

  1. AIncrease, because preferred dividends become more attractive
  2. BRemain unchanged, because preferred dividends are fixed
  3. CDecrease, because the fixed dividend becomes less attractive relative to new market rates✓ Correct answer
  4. DIncrease, because the company will increase the dividend rate
Explanation

Why C — Decrease, because the fixed dividend becomes less attractive relative to new market rates

Preferred stock pays a fixed dividend rate, making it behave similarly to bonds in response to interest rate changes. When market rates rise, newly issued securities offer higher yields, making the fixed dividend on existing preferred stock less attractive. This causes the market price of preferred stock to decline, exhibiting an inverse relationship with interest rates.

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