Callable Preferred Stock

AAA

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."

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Hybrid Security

    A security that combines two or more different financial instruments. ...
  2. Measuring Principle

    In techincal analysis, An intangible principle for finding mininum ...
  3. Callable Bond

    A bond that can be redeemed by the issuer prior to its maturity. ...
  4. Common Stock

    A security that represents ownership in a corporation. Holders ...
  5. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  6. Zero-Dividend Preferred Stock

    A preferred share that is not required to pay a dividend to its ...
Related Articles
  1. What is the difference between preferred ...
    Investing

    What is the difference between preferred ...

  2. Stock Basics Tutorial
    Investing Basics

    Stock Basics Tutorial

  3. A Primer On Preferred Stocks
    Bonds & Fixed Income

    A Primer On Preferred Stocks

  4. How are preferred stock dividends taxed?
    Taxes

    How are preferred stock dividends taxed?

Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  3. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  4. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  5. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  6. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
Trading Center