# Review question

282C9-Y2K4T
MVK4H-3KGB3
Also I have to prep for my test in 1 week? any suggestions ?Thank you !

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Hi @Erika! Thanks for reaching out. Let’s look at those questions:

282C9-Y2K4T
FYI - mutliple versions of this question exist, so the numbers quoted below may be a bit different. However, the question format is the same.

ABC Company \$50 par, 7% preferred shares are trading in the market at \$53. Which of the following statements is true?

A) The current yield is 6.60%
B) The 7% dividend rate is based on the \$53 market value
C) An investor will receive \$3.50 per dividend payment
D) All of these choices

Let’s break down the three wrong answers, then discuss the correct one. Answer choice B is incorrect because the 7% dividend rate (coupon) is always based on par. These shares pay 7% of the \$50 par value annually, which equates \$3.50 per year. Keep in mind that preferred stock typically pays semi-annual dividends, which is why answer choice C is incorrect. \$3.50 paid over two dividend payments will equal \$1.75 per dividend payment. With answer choices B and C incorrect, obviously D cannot be true.

To find the current yield for these shares, we’ll divide the annual income (\$3.50) by the market price (\$53), which equals 6.60%. Therefore, A is our correct answer.

The trick to this question is knowing how preferred shares work, and it tests their characteristics from multiple angles. Here are the big points in summary form:

• CY = annual income / market price
• The dividend rate of preferred shares is always based on par (not market value)
• Preferred shares typically make semi-annual (twice a year) payments

MVK4H-3KGB3
Same thing with this question as the previous one - the numbers will probably be different, but the overall question structure will be the same.

A customer, age 35, purchases a 10.00% \$100 par preferred stock with a current yield of 11.09%. Which of the following is the market price for the preferred stock?

A) \$83.83
B) \$90.19
C) \$94.76
D) \$97.68

This question tests your knowledge of current yield. Let’s restate the formula:

CY = Annual income / market price

The tricky part about this question is that we’re given the current yield (11.09%) and can find the annual income, but do not have the market price. The annual income can be found by multiplying the dividend rate (10%) by the par value (\$100). Therefore, this preferred stock pays \$10 in dividends annually per share. With that being said, let’s restate the formula:

11.09% = \$10 / market price

The easiest way to get the answer is to plug in each answer choice into the formula to see if we get 11.09%. Let’s do that:

A) \$10 annual income / \$83.83 = 11.93%
B) \$10 annual income / \$90.19 = 11.09%
C) \$10 annual income / \$94.76 = 10.55%
D) \$10 annual income / \$97.68 = 10.24%

The answer is B because it’s the only one that matches up with the provided current yield. I hope this helps!

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To answer your question on how to approach your exam in the next 7 days, I recommend reading over our Wrapping up chapter. Here’s a quick summary of what I’d recommend to anyone about to take the exam: