Definition
The term adjustable rate preferred stock refers to a security that varies the level of dividends paid with a benchmark. The rate of dividends paid typically resets on a quarterly basis, and the most common benchmark is the Treasury bill.
Explanation
Also known as variable rate preferred stock, adjustable rate preferred stock (ARPS) includes those securities that vary the level of dividend paid as interest rates rise and fall. The dividend payment is determined using a predetermined formula and a benchmark such as the rate of interest paid on T-bills.
The market value of fixed rate preferred stock will usually vary with interest rates over time. As interest rates fall, the value of the preferred stock will rise. If interest rates increase, the value of the preferred stock will decline. The market value of variable rate preferred stock is much more stable. If interest rates increase, the dividend on these securities increases too, thereby insulating the security's market value from changes in interest rates.
In addition to stabilizing the value of these securities, the holders of preferred stock are the first eligible to receive dividend payments in the event the company experiences short term financial distress. The stability of market value as well as the preference with respect to dividends, makes these securities very attractive to investors seeking a reliable source of income in addition to preservation of capital.
Related Terms
- The term target date fund refers to a portfolio that changes the allocation of assets to a more conservative proportion over time. Target date funds are a subset of asset allocation funds, offering individuals a variety of timelines over which the portfolio rebalances.
Moneyzine EditorNovember 6th, 2024 
The term bond fund refers to a portfolio of debt instruments as well as other types of indentures. Bond funds will hold debt instruments of different maturities, thereby providing investors with a steady source of income over time.Moneyzine EditorNovember 6th, 2024- The term real estate fund refers to an investment strategy that focuses on securities issued by real estate companies. The objective of real estate funds is to allow investors to participate in the market without directly purchasing properties.Moneyzine EditorNovember 6th, 2024
