Question

Which of the following statements are TRUE when comparing convertible preferred stock and non-convertible preferred stock?

I - Convertible preferred issues will have a higher yield than similar non-convertible yields of the same issuer
II - Non-convertible preferred issues will have a higher yield than similar convertible yields of the same issuer
III - Convertible preferred stockholders can benefit as the common stock price rises
IV - Non-convertible preferred stockholders can benefit as the common stock price rises

Answer 1

Convertible preferred stock and non-convertible preferred stock differ in terms of yields and the benefits received as the common stock price rises. II, III are the statements which are true.

Step-by-step explanation:

I - The statement is false. Convertible preferred stock generally carries lower yields than non-convertible preferred stock, since the convertible feature adds value to the security.

II - The statement is true. Non-convertible preferred stock usually offers higher yields compared to convertible preferred stock.

III - The statement is true. The price of convertible preferred stock typically increases as the price of the underlying common stock rises, allowing the holders to benefit.

IV - The statement is false. Non-convertible preferred stockholders do not directly benefit as the price of common stock rises.