HOW DO INTEREST RATES AFFECT PREFERRED SHARE PRICES? - ProProfs Discuss
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How do interest rates affect preferred share prices?



Asked by Erland, Last updated: Aug 09, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

The price of a preferred share reacts to interest rates the same way bonds do, and forthe same reason.if you own a preferred share with a par value of $25 and it pays a fixed dividend of 5%(or $1.25 annually), consider what happens if market interest rates jump to 10%.investors can find securities that are paying returns of 10%, while your preferred shareis paying only 5%. how much would you be able to sell your preferred share for,considering the buyer will want a return near 10%? you would have to drop the priceof your preferred share to near $12.50 in order to attract other investors (keep in mindthis is an exaggerated example). as such, when interest rates rise, preferred shareprices fall.
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