Definition
The term preferred equity redemption stock refers to a security that features a mandatory conversion at maturity. Preferred equity redemption stock (PERC) can also be redeemed early by the issuing entity, but at a premium.
Explanation
Also known as preferred equity redemption cumulative stock (PERCS), preferred equity redemption stock is considered an equity derivative that involves a mandatory conversion to preferred stock. The holder of the stock is not only entitled to the yield on the security, but also capital appreciation (subject to a cap).
On the redemption date, which is typically three to five years after the issue date, the holder of each share of PERC receives:
If the current price of common stock is lower than the price cap, the holder receives one share of common stock for each share of preferred stock held.
If the current price of common stock is higher than the price cap, the holder receives one share of common stock equal in value to the price cap for each share of preferred stock held. For example, if the price cap is $20.00 and the current price of common stock is $25.00, the preferred shareholder would receive $20.00 / $25.00, or 0.8 shares of common stock for each share of preferred stock held.