Question

Which statements are TRUE about preferred stock?

I When interest rates rise, preferred stock prices rise
II When interest rates rise, preferred stock prices fall
III When interest rates fall, preferred stock prices fall
IV When interest rates fall, preferred stock prices rise

A. I and II
B. I and III
C. II and III
D. II and IV

Answer 1

C. 2 and 3

Step-by-step explanation:

Interest Rate & preferred stock price are inversely / negatively related. This implies that (2) an increase in interest lead leads to stock price fall , (3) a fall in interest rate leads to increase in stock price.

This happens because : When interest rate rises - lending / depositing in banks become more lucrative than consuming , purchasing stock . This implies the opportunity cost (next best alternative value) of consumption, stock investment increases. More opportunity cost of stock investment reduces stock demand & reduces its price. More opportunity cost of consumption reduces it , and less earnings also imply less stock prices.

Similarly, lesser interest rates make people tending to replace lending/ depositing by higher consumption, alternatives (stock) investment . Higher consumption & higher earnings, higher stock demand then lead to higher stock prices.