Preferred Stock
Equity with a fixed stated dividend, priority over common stock for dividends and liquidation, and normally no voting rights; its market price behaves like a bond, falling when interest rates rise.
The exam loves to make you rank claimants in a liquidation: secured creditors, then bondholders/debentures, then preferred ahead of common, with common last. The tell is “which security is paid first” or “highest stated yield among preferred types” — adjustable-rate preferred trades the most price stability, so it carries the lowest stated yield, while callable preferred carries the highest. Another favorite: a missed dividend on cumulative preferred accrues in arrears, but straight (noncumulative) preferred simply loses it forever. Remember: preferred is paid before common, never before debt.
Watch the classic traps. Unlike common stock, preferred normally has no voting and no preemptive rights — so questions about electing directors or maintaining proportional ownership point to common. Don’t confuse a stock dividend (untaxed at receipt — the same basis just spreads over more shares) with preferred’s fixed cash payout. And because its price tracks rates like a bond, the same interest-rate risk logic applies — rising rates push preferred prices down, falling rates make callable issues vulnerable to redemption exactly when reinvestment hurts.
PlayPrepHQ study notes are written and reviewed against primary exam sources. How we create & review content →