Canadian Securities Course (CSC) Level 1 Practice Exam

When would floating-rate preferreds be issued?

1. When the issuer believes interest rates will decrease.

2. During periods when interest rates are high.

3. During times where straight preferreds are easy to sell in the market.

4. During periods in the market where straight preferreds are hard to sell and the issuer doesn't want to make the issue convertible or retractable.

The correct answer is: During periods in the market where straight preferreds are hard to sell and the issuer doesn't want to make the issue convertible or retractable.

Floating-rate preferred shares would typically be issued during periods in the market where straight preferred shares are hard to sell and the issuer doesn't want to make the issue convertible or retractable. In such market conditions, investors may prefer the flexibility and potential for increased returns that come with floating-rate securities. This makes option D the correct answer. Option A is incorrect because floating-rate preferreds are usually not issued when the issuer believes interest rates will decrease as these securities provide some protection against rising interest rates. Option B is incorrect because floating-rate preferreds are more attractive to investors during periods of low interest rates, as the floating rate can provide higher yields when interest rates rise. Option C is incorrect because the issuance of floating-rate preferreds is not dependent on the ease of selling straight preferreds in the market.