Week 3 DQ 2

Why is preferred stock referred to as preferred? What are some of the features added to preferred stock that make it more attractive to investors? Would you select preferred stock or common stock as an investment? Why?

1. Callable preferred stock: has an embedded option allowing the issuer to call shares, either at par or at a slight premium above par. In a typical arrangement, shares are not callable for the first few years following issuance but can be called, perhaps with a month's notice, any time thereafter. As with callable bonds, the price behavior of callable preferred stock depends on whether the call option is in-the-money or out-of-the-money as well as the financial strength of the issuer.

2. Adjustable-rate preferred stock: has a dividend yield that, instead of...