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Online Share Trading

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Preference Shares

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Jackfrost
Occasional Contributor
Hi All, as an alternative to Money Market Pref shares are attractive from a taxperspective.But my concern is regarding possible volatility of Pref Share prices.Is there any objective data regarding the effect of interest rates on Pref Share prices.My understanding is that these are essentially debt instruments so do they behave like Bonds??.New to Trading so trying to preserve retirement capital
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StanleyB
Contributor
Capital value can be affected by interest rates. Extracts from Apr 08 ABSA newsletter - Since June 2006, however, as the prime interest rate has been rising, dividend yields have moved commensurately higher but capital values have declined. - For every 100 basis points ("bp") that official interest rates rise, money market rates generally rise by the same magnitude. The money market may pre-empt changes in official interest rates (the repo rate) but generally for every 100bp increase in the repo rate there is a commensurate 100bp increase in money market rates. The payout on the prefs though, does not change by the same magnitude. For every 100bp that the repo rate is adjusted, the prime rate is adjusted by 100bp but the payout on the Absa prefs, for example, only changes by 68bp (the Absa pref. shares pay out 68% of the prime rate). In a declining interest rate environment then, the payout on the prefs reduces at a slower rate than the money market rates while in a rising interest rate environment the payout on the prefs lags the increase in money market rates. Thus preference shares are relatively more attractive than the money market as the repo rate is cut but lose some of their relative attractiveness as the repo rate is hiked.
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Jackfrost
Occasional Contributor
Found an excellent recent guide with good local data in the How to guides under Help and Education.With study this will meet all my needs.Thanks for your response StanleyB
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Jackfrost
Occasional Contributor
Found an excellent recent guide with good local data in the How to guides under Help and Education.With study this will meet all my needs.Thanks for your response StanleyB
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