Canadian Securities Course (CSC) Practice Exam

What protects against interest rate increases but can result in decreased dividends if interest rates fall?

1. Floating preferreds

2. Buy-in

3. Confirmation

4. Two main types of derivatives

The correct answer is: Floating preferreds

Floating preferreds are a type of financial securities that offer protection against interest rate increases. They have floating or variable interest rates, meaning that the interest rate on the investment changes in relation to market interest rates. This type of investment is considered to be a safer option because it reduces the risk associated with fixed interest rate investments. However, if interest rates were to fall, the dividends on the floating preferred may also decrease. The other options, such as buy-in, confirmation, and derivatives, do not offer protection against interest rate increases. A buy-in is a transaction in which an investor buys shares back in order to close out an existing short position. A confirmation is a document that serves as evidence of a financial transaction. And two main types of derivatives, such as options and futures, are financial instruments that derive their value from underlying assets, but they do not necessarily protect against interest rate increases.