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    Preferred Stock

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    Barnes Air Conditioning, Inc., has two classes of preferred stock: floating rate preferred stock and straight (normal) preferred stock. Both issues have a par value of $100. The floating rate preferred stock pays an annual dividend yield of 6 percent, and the straight preferred stock pays 7 percent. Since the issuance of the two securities, interest rates have gone up by 2 percent for each issue.

    Both securities will pay their year-end dividend today.
    a. What is the price of the floating rate preferred stock likely to be?
    a. Very close to par value
    b. Greater than par value
    c. Less than the par value

    What is the price of the straight preferred stock likely to be?

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    Solution Preview

    Floating Rate Preferred Stock

    New Yield = Current Yield + Increase in Interest rate = 6% + 2% = 8%

    New Price = ...

    Solution Summary

    The expert examines preferred stocks for Barnes Air Conditioning.