- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Investments
- Learning Module 8. Equity Valuation: Concepts and Basic Tools
- Subject 4. Preferred Stock Valuation
CFA Practice Question
Yields on nonconvertible preferred stock are usually lower than yields on bonds of the same company because of differences in ______.
B. risk
C. taxation
A. marketability
B. risk
C. taxation
Correct Answer: C
User Contributed Comments 7
| User | Comment |
|---|---|
| mtcfa | As it relates to corporate taxation. |
| sarath | corporate taxation allows 80% tax exemption on preferred stock dividends.. |
| bahodir | Can the yields on convertable pref. stock be higher than yields on bonds? I mean there is no need to point at nonconvertable stock. |
| papajeff | I think this has more to do with shareholder taxation, meaning the dividend tax credit increase net return. |
| mjwoulf | Just thinking out loud, but since the preferred shares are in line after bonds in case of a failing company - wouldn't risk also be a factor? |
| mjwoulf | Oops - that was backwards. |
| vadfir | Preferred stocks have a higher yield than bonds to compensate for the higher risk (bonds take precedence over preferred stocks in bankruptcy proceedings). Interest payments on bonds are legal obligations and are payable before tax payments, dividends on preferred stocks are after-tax payments and are not made if the company is facing financial difficulties. Tax-free for those in the 10% and 15% brackets to the extent qualified dividend income remains within those brackets. Taxed at a 15% rate for those in the 25% up to 35% tax brackets. Taxed at a 20% rate for higher income taxpayers whose income surpasses the 35% tax bracket. |