Canadian Securities Course (CSC) Level 1 Practice Exam

How do Callable and Non-callable preferreds work?

1. Callable preferreds can never be redeemed.

2. Issuer can redeem non-callable preferreds at any time at a pre-stated price.

3. Callable preferreds can be called by the issuer at a specific time and price.

4. Non-callable's can be redeemed if interest rates rise substantially.

The correct answer is: Callable preferreds can be called by the issuer at a specific time and price.

Callable preferred shares can be called back or redeemed by the issuer at a specific time and price determined at the issuance of the shares. This feature gives the issuer the flexibility to call back the shares when it's beneficial for them, such as when interest rates have fallen, allowing them to issue new shares at a lower rate. On the other hand, non-callable preferred shares do not have this feature, meaning the issuer cannot redeem them before their maturity date. This is why option C is the correct answer as it accurately describes how callable preferred shares work.