Which feature allows the issuer to retire the preferred stock when interest rates decline?

• A. Straight
• B. Cumulative
• C. Participating
• D. Callable

Answer: (D)

This question centers on the callable feature of preferred stock. When a preferred issue is callable, the issuer has the right to retire or buy back the shares at a set call price after a specified date. If interest rates decline, the issuer can call away its existing (higher-coupon) preferred stock and replace it with new financing at the lower prevailing rates, reducing dividend costs. The callable provision is the mechanism that lets the issuer retire the stock.

The other features don’t give the issuer a retirement option: straight refers to non-convertible, plain stock; cumulative means missed dividends accumulate and must be paid later; participating allows holders to receive additional dividend amounts beyond the fixed rate. None of these provide a means to retire the stock.