Callable Preferred Stock

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DEFINITION of 'Callable Preferred Stock'

A type of preferred stock in which the issuer has the right to call in or redeem the stock at a preset price after a defined date. The terms of a callable preferred stock issue, such as the call price, the date after which it can be called, and the call premium (if any) are all defined in the prospectus at the time of issue and cannot be changed later. As with regular preferred shares, dividends on callable preferred shares must be paid by the issuer ahead of any dividends on its common shares. Also known as "redeemable preferred stock" or "callable preferred shares."

BREAKING DOWN 'Callable Preferred Stock'

A callable preferred stock issue is advantageous to the issuer, since it confers the flexibility to lower the issuer's cost of capital if interest rates decline or if it can issue preferred stock later at a lower dividend rate. For example, a company that has issued callable preferred stock with a 7% dividend rate is quite likely to call the issue if it can issue new preferreds carrying a 4% dividend rate.

The investor who holds callable preferreds, on the other hand, is at a disadvantage. If the preferred issue is called by the issuer, the investor will most likely be faced with the prospect of reinvesting the proceeds at a lower dividend or interest rate. The call premium that the issuer pledges to pay at redemption of the preferred issue is meant to compensate the investor for part of this reinvestment risk.

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