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Finance Homework Question!?
How is preferred stock affected by a decrease in the required rate of return?
a.) The dividend increases b. ) the value of a share of preferred stock decreases. C.) the dividend decreases. D. None of the above are correct.
And Second Question:
If the market price of a bond increases then:
a.) The coupon rate increases. B.) the yield to maturity decreases. C.) the yield to maturity increases. D.) none of the others.
Thank you so much!
3 Answers
- Don GLv 710 years agoFavorite Answer
1. D - The annual dividend on Preferred stock is based on the rate fixed at the date of issue.
2. B - The question refers to someone who buys the bond after a market price increase. Compared to a previous purchase at a lower price, YTM decreases.
- Anonymous10 years ago
1.
V= C/r is the value of a perpetuity.
The dividends for a preferred stock are constant, so a and c cannot be correct.
If the denominator decreases, then Value increase
Q1. D
Q2.
Coupons for bonds are fixed (usually, there are some bonds that are indexed to inflation, but usually coupons are constant) , so it cannot be option a.
The yield to maturity does not depend on the price! The price depends on the yield to maturity.
Therefore it cannot be options b and c
Q2. D