Products & RisksQuestion 52 of 125
Preferred stock is generally considered more sensitive to interest rate changes than common stock because preferred:
a.Has voting rights
b.Pays dividends that grow with earnings
c.Represents a residual claim on assets
d.Pays a fixed dividend, causing it to behave like a fixed-income security
Explanation
Because most preferred stock pays a fixed dividend, its price moves inversely with interest rates much like a bond. When rates rise, the fixed dividend becomes less attractive and preferred prices fall. Common stock dividends can vary with earnings, so common is less directly tied to rate movements.
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