Series 7 Exam Question 164: Answer and Explanation

Question: 164

Which of the following types of preferred stock allows the investor to reduce inflation risk?

• A. Cumulative
• B. Noncumulative
• C. Convertible
• D. Participating

Correct Answer: C

Explanation:

C. Preferred stockholders and bondholders are subject to inflation risk. Inflation risk is the risk that the fixed interest or dividend payments will become worth less over time in terms of purchasing power. By purchasing convertible preferred stock, investors may convert their preferred stock into common stock of the same corporation at any time. Common stock has a greater chance of keeping pace with inflation, which reduces the inflation risk.