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FINRA Series 7 Question of the Day

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15 November 2026
3.2a Reviews and analyzes customers' investment profiles and product options to determine that investment recommendations meet applicable standards: Equity securities
A client holds preferred stock with a par value of $100 and a 5% stated dividend rate. The shares are convertible at $25 per share and callable at $105. The common stock of the issuer is currently trading at $28 per share, and the preferred stock is trading at $110 per share. Upon announcement that the issuer will call these preferred shares, what is the most financially advantageous action for a client holding these preferred shares in the Series 7 context?
A.Convert the preferred shares into common stock.
B.Allow the shares to be called at the stated call price.
C.Sell the preferred shares in the open market at their current price.
D.Hold the preferred shares, expecting future dividend payments.
Rationale:
The most financially advantageous action is to convert the preferred shares into common stock. When a convertible preferred stock is called, the investor has a choice between allowing the call (receiving the call price) or converting the shares into common stock (receiving the common stock's market value). To determine the conversion value, first calculate the conversion ratio by dividing the preferred stock's par value by the conversion price ($100 par / $25 conversion price = 4 shares of common stock). Then, multiply this ratio by the current market price of the common stock (4 shares * $28/share = $112). Since $112 (conversion value) is greater than the $105 call price, converting to common stock is the optimal choice. Allowing the shares to be called is incorrect because it yields only $105, which is less than the conversion value. Selling the preferred shares in the open market for $110 is incorrect because, while better than allowing the call, it is still less than the $112 value achievable through conversion. Holding the preferred shares, expecting future dividend payments, is incorrect because the shares are being called by the issuer and will cease to exist, thus eliminating any future dividend payments.