Canadian Securities Course (CSC) Practice Exam

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Which of the following are protected against interest rate increases, but dividends can decrease if interest rates fall?

Buy-in
Two main types of derivatives
Confirmation
Floating preferreds

The correct answer is: Floating preferreds

Floating preferreds are protected against interest rate increases because the dividend rate is linked to a benchmark interest rate, such as the Prime Rate. This means that as interest rates rise, the dividend rate on floating preferred shares also increases, providing a hedge against rising interest rates. However, if interest rates fall, the dividend rate on floating preferreds can decrease as well. The other options, such as Buy-in, Two main types of derivatives, and Confirmation, do not specifically relate to the protection against interest rate increases or the potential decrease in dividends based on interest rate movements, making them incorrect choices for this question.