Canadian Securities Course (CSC) Level 1 Practice Exam

What advantages do floating rate preferred shares have?

1. They guarantee a fixed dividend amount.

2. They pay dividends in a fixed amount annually.

3. Pay dividends in amounts that fluctuate based off of interest rates.

4. Have priority over common shares in dividend payments.

The correct answer is: Pay dividends in amounts that fluctuate based off of interest rates.

Floating rate preferred shares provide dividends that fluctuate based on changes in interest rates. This feature can offer investors a hedge against rising interest rates, as the dividends increase when interest rates go up. Unlike fixed-rate preferred shares, which offer stable dividend payments regardless of market conditions, floating rate preferred shares can potentially deliver higher returns in a rising interest rate environment. In contrast, fixed dividend guarantees and fixed annual payments, such as those mentioned in the other options, do not allow for any responsiveness to changes in the economic landscape. Additionally, while having priority over common shares in dividend payments is a characteristic of preferred shares in general, it does not specifically highlight the unique advantage of floating rate preferred shares.