Interest Rate Risk

Which of the following securities is most susceptible to interest rate risk?
A. straight preferred stock
B. convertible preferred stock
C. convertible debentures
D. common stock

EXPLANATION: bonds and preferred stock are subject to interest rate risk--rates up, market price down. They pay a fixed rate of return, so whenever interest rates on new fixed income securities go up, the market values of existing fixed income securities drop. Every single time. Common stock doesn't pay a fixed rate of return, so interest rates are not as relevant to its market price. The market price for common stock is based on expectation of future profits, with bits of news driving those expectations up and down every day.
All righty then. Using these fundamental concepts, we can eliminate common stock, and then, since common stock drives the value of convertible preferred and convertible bonds, we can eliminate those two choices, too. We're left with straight preferred stock, which pays a fixed rate of return, period.
ANSWER: A

Convertible Preferred Securities in the Real World

Reading my Chicago Sun-Times this morning, I noticed that when we talk about the federal government "bailing out the big banks" like Bank of America and Citigroup, we're really talking about convertible preferred securities.
Seriously. The federal government likes to provide capital/cash to banks in exchange for convertible preferred stock. While the bank struggles to get back on its feet, the federal government receives a fixed income stream on the preferred stock and then, should the bank eventually find its footing, the common stock rises, the federal government converts to common stock, and realizes a nice "profit" for taxpayers sitting back virtually clueless about the whole thing. Does it ever work out as planned? Sure, when the federal government guaranteed loans for Chrysler last time they threatened to go belly up, the government got an equity kicker. When the company recovered, and the common stock rose, the government exercised their warrants and realized a big profit for taxpayers.
Isn't this a great country? What, you thought our elected officials in Washington were just winging it? Not necessarily. Warren Buffet put $5 billion into Goldman-Sachs 10% convertible preferred stock back in September, which means Berkshire-Hathaway (of which I own 2 B-shares) receives $500 million per year in dividend income while they wait for Goldman-Sachs' common stock to rise above the conversion or strike price on the upside. What could lay such plans to waste?
The b-word, bankruptcy. $500 million in dividends per year sounds great, until the company goes belly-up and causes a wicked loss of maybe 80-90% of $5 billion. Ouch.
Of course, that's how it would play out at Berkshire-Hathaway, a profit-making enterprise. With the folks in Washington, they're all playing with the house's money, known as our tax dollars.