NASAA Series 66 Uniform Combined State Law ExaminationInvestment Vehicle CharacteristicsEasy
A client is interested in investing in a security that pays a fixed dividend, typically has no voting rights, and has a claim on the company's assets and earnings senior to common stock but junior to bonds. Which type of security is the client considering?
- APreferred Stock
- BCommon Stock
- CCorporate Bond
- DConvertible Debenture
Show answer & explanationAnswer & explanation
Correct answer: A. Preferred Stock
Preferred stock is characterized by fixed dividends, no voting rights, and a senior claim to common stock in liquidation, but junior to bonds.
Why the other options are wrong
- B. Common stock has voting rights and variable dividends, junior claim.
- C. Corporate bonds represent debt, have a fixed interest payment, and the most senior claim.
- D. Convertible debentures are unsecured bonds that can be converted into common stock, not typically having fixed dividends as their primary feature.
Preferred Stock
A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, but typically does not carry voting rights.
- Fixed dividend payments
- No voting rights (generally)
- Senior to common stock in liquidation
- Junior to bonds in liquidation
Memory trick: Equity is ownership, but 'preferred' gets paid first.