Preferred stock which permits the owner to exchange it for common stock under set terms and conditions is:

Preferred stock which permits the owner to exchange it for common stock under set terms and conditions is:

• A. Convertible preferred stock
• B. Callable preferred stock
• C. Cumulative preferred stock
• D. Participating preferred stock

Answer: (A)

The feature being described is the conversion privilege of convertible preferred stock. This type of preferred stock can be exchanged for a predetermined number of common shares at set terms, usually defined by a conversion ratio and conversion price. Because of this, holders have the upside potential of benefiting if the common stock’s price rises, while still receiving the fixed dividends of preferred stock until they convert. This is why it’s the best fit: the core idea is the ability to swap the preferred for common stock under specific terms, which is exactly what a convertible preferred security offers. The other types don’t describe this exchange right. Callable preferred stock can be redeemed by the issuer, not exchanged for common. Cumulative preferred stock involves dividends that accumulate if not paid, with no conversion aspect. Participating preferred stock may receive extra dividends beyond the fixed rate, but again, no standard conversion into common shares.

The feature being described is the conversion privilege of convertible preferred stock. This type of preferred stock can be exchanged for a predetermined number of common shares at set terms, usually defined by a conversion ratio and conversion price. Because of this, holders have the upside potential of benefiting if the common stock’s price rises, while still receiving the fixed dividends of preferred stock until they convert.

This is why it’s the best fit: the core idea is the ability to swap the preferred for common stock under specific terms, which is exactly what a convertible preferred security offers. The other types don’t describe this exchange right. Callable preferred stock can be redeemed by the issuer, not exchanged for common. Cumulative preferred stock involves dividends that accumulate if not paid, with no conversion aspect. Participating preferred stock may receive extra dividends beyond the fixed rate, but again, no standard conversion into common shares.