An individual may purchase preferred stock
1. in anticipation of lower interest rates
2. in anticipation of higher interest rates
3. to receive a flow of tax-free income
4. to receive a flow of income

Question

Quizplus · Accepted Answer

Preferred stock often pays fixed dividends, making it similar to bonds. When investors anticipate lower interest rates, they might buy preferred stocks to lock in higher dividend yields compared to future bond yields. Preferred stock dividends are not tax-free; they are taxed, so option 3 is incorrect. Thus, investors may purchase preferred stocks to receive a flow of income, making options 1 and 4 correct.

An Individual May Purchase Preferred Stock