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"Equity Investments":Advantages of convertible preferred stock
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Questions 1:
A trader seeking to sell a very large block of stock for her client will most likely execute the trade in a(n):
A、 quote-driven market.
B、 order-driven market.
C、 brokered market.
Questions 2:
The advantages to an investor owning convertible preference shares of a company most likely include:
A、 less price volatility than the underlying common shares.
B、 an opportunity to receive additional dividends if the company’s profits exceed a pre-specified level.
C 、preference dividends that are fixed contractual obligations of the company.
View answer resolution
【Answer to question 1】C
【analysis】
C is correct. Instruments that are infrequently traded and expensive to carry as inventory (e.g., very large blocks of stock, real estate properties, fine art masterpieces, and liquor licenses) are executed in brokered markets. Organizing order-driven markets for such instruments is not sensible because too few traders would submit orders to them.
A is incorrect. In quote-driven markets (also called price-driven, dealer, or OTC markets) customers trade with dealers, and the instruments traded are mostly bonds, currencies, and spot commodities.
B is incorrect. An order-driven market follows an order matching system run by an exchange or a broker using rules to arrange trades submitted by traders.
【Answer to question 2】A
【analysis】
A is correct. Convertible preference shares tend to exhibit less price volatility than the underlying common shares because the dividend payments are known and more stable.
B is incorrect. An opportunity to receive additional dividend if the company’s profits exceed a pre-specified level is the benefit that accrues to the holders of participating preferred shares, not convertible preference shareholders.
C is incorrect. Preference dividends are fixed but, unlike interest payment on debt, they are not contractual obligations of the company.
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