Question

2. Which of the following is a characteristic of preferred stock?

1. Give voting rights to its owner.
2. It is like annuity.
3. Investors cannot force the payment of the dividend.
4. Dividends are tax-deductible for the firm as opposed to interest payment.

3. Which of the following is NOT money market security?

      A. Bankers acceptance

      B. Treasury notes

      C. Federal funds

      D. Eurodollars and Eurodollar CD's

8. You purchased a share of stock for $50. Two years later you received $2 as dividend and sold the share for $59. What was your holding period return?

18%

22%

20%

25%

9. Related to the previous question, what was your effective annual rate?

• 12.5%

10.5%

10.0%

9.5%

Answer 1

2. Answer is B. It is like annuity.

Dividends on preferred stock are fixed. it will not change till the preferred stock is outstanding. every year preferred stock holder will receive the same dividend which is similar like annuity.

rest of the options are not a characteristic of preferred stock and/or incorrect about preferred stock.

3. Answer is B. Treasury notes.

Treasury notes have maturities of 1 to 10 years and long-term whereas money market securities have maturities of less than or equal to 1 year and are short-term.

rest of the options are money market securities.

8. Answer is 22%.

holding period return = [(selling price of stock + dividend)/purchase price of stock] - 1

holding period return = [($59 + $2)/$50] - 1 = ($61/$50) - 1 = 1.22‬ - 1 = 0.22‬ or 22‬%

9. Answer is 10.5%.

effective annual rate = [(selling price of stock + dividend)/purchase price of stock]^{1/no. of years} - 1

effective annual rate = [($59 + $2)/$50]^1/2 - 1 = ($61/$50)^0.5 - 1 = 1.22^0.5‬ - 1 = 1.105 - 1 = 0.105 or 10.5%