Securities Industry Essentials (SIE) ExamUnderstanding Products and Their RisksMedium
A client is interested in an investment that offers a fixed income stream, a stated maturity date, and a priority claim on assets over common stockholders in the event of liquidation. However, they are also concerned about interest rate risk impacting the value of their investment in the secondary market. Which of the following securities best fits this description?
- AVariable Annuity
- BPreferred Stock
- CCommon Stock
- DMutual Fund
Show answer & explanationAnswer & explanation
Correct answer: B. Preferred Stock
Preferred stock offers a fixed dividend (income stream), has a par value that typically implies a maturity for valuation purposes, and has a higher claim on assets than common stock. Its fixed income nature makes it sensitive to interest rate changes.
Why the other options are wrong
- A. A variable annuity is an insurance contract with investment features, not a security with a fixed income and priority claim on assets.
- C. Common stock offers variable dividends, no fixed maturity, and the lowest claim on assets.
- D. A mutual fund is a diversified portfolio, not a single security with a fixed income and priority claim.
Preferred Stock Characteristics
Preferred stock is a type of equity security that pays a fixed dividend and has a higher claim on a company's assets and earnings than common stock, but typically no voting rights.
- Fixed dividend payments
- Priority in liquidation over common stock
- No voting rights (generally)
- Sensitive to interest rate changes
Memory trick: F.I.X.E.D. for Preferred Stock: Fixed Income, eXit priority, Equity-like, Dividend, Interest rate sensitive, No voting.