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Strategies & Market Trends : TRIPLE TRADES -- Ignore unavailable to you. Want to Upgrade?

To: robert b furman who wrote (660)	3/16/2021 2:57:57 AM
From: Bull RidaH	Respond to of 4432

Uncle Bob!! Bonne question!! Your preferred stock coupon rate/yield *will not* be impacted by rising market yields on Treasuries. So you will still receive exactly the same dividend amount, no matter what happens to Treasury Bond prices and their corresponding yields. But your preferred share price set on the open market through trades *would be* expected to decline, as the rising discount rate applied to the income stream from the preferred dividends results in a decreased value of that stream. The below example shows WHY that occurs. Let's look at an example where you own 1000 shares of a preferred stock with a par value of $100 and a 4% coupon rate paying you $4,000 total in dividends per year. Let's assume you purchased the stock right at par, for $100,000 total, when rates for the 10 year T-Bond were 1%, which we will assign as the risk free discount rate. If your $4,000 per year income stream had 0.00% chance of failing to be paid, it would be worth exactly what it would cost to purchase that income stream at the risk free rate (1%), which is $400,000. But you only paid $100,000 for it, receiving a $300,000 discount in purchasing the preferred dividend stream from xyz company to compensate you for the myriad of risks you assume in collecting the dividend. If the risk free rate rises to 1.2%, the same $4,000 per year income stream would only cost $333,333 to purchase, resulting in a loss of $66,666 in market value to the security offering that stream. So a 20% rise in rates translates to a 16.66% decrease in the value of the security that pays that dividend. But it's not a loss you will realize unless you are forced to sell the stock. But it's a potential loss you better damn well be aware of if you or an heir decides to sell the security *AFTER* rates rise. These concepts are the heart of any Finance Curriculum a student looking to major in Finance (which I did) would be engrossed in. The key message here for ALL onlookers is.... all equities in the long-term are valued based upon the risk-free rate combined with total risks associated with the equity's ability to maintain/grow their earning stream. Higher rates and higher profit risks are a lethal combination that can result in catastrophic reductions in equity values, resulting in bear markets and crashes. Unfortunately, It should be obvious by now we have entered such a time, and it won't be possible for some equities and indices to continue to trade at these valuations much longer. Quality technical analysis gives the when and where, which is what this thread is all about. But if the discussion turns to fundamental analysis, one must ALWAYS consider interest rate direction and earnings sustainability as the most important factors in the equation to determine true value, which the market will always eventually be drawn towards.