With floating-rate preferred stock, dividends are directly linked to interest rates.

Question

Quizplus · Accepted Answer

Floating-rate preferred stock dividends are usually calculated as a fixed spread above a benchmark interest rate (such as LIBOR or the federal funds rate). As interest rates rise, the benchmark rate increases, causing the dividend paid to investors to also increase. Conversely, if interest rates fall, the dividend paid will decrease as well. Therefore, the dividends are directly linked to interest rates.

With Floating-Rate Preferred Stock, Dividends Are Directly Linked to Interest