Definition
The term convertible adjustable preferred stock refers to a floating rate security with an interest rate that is indexed to Treasury securities. Convertible adjustable preferred stock can be converted by the holder on the dividend payment date.
Explanation
Also known as capital market preferred stock (CMPS), convertible adjustable preferred stock (CAPS) provides investors with a floating rate that is typically indexed to a Treasury security. The holder of these shares has the option to convert the CAPS to common stock on the dividend payment date.
The number of common shares received is equal to the par value of the preferred. This mechanism provides the investor with a preservation of capital feature in the event the credit rating of the issuer was to decline. Issuers will normally place a cap on the number of shares received upon conversion. This protects the issuer from a change in control in the event the price of the issuer's common stock drops to unusually low levels.
Related Terms
The term auction rate preferred stock refers to securities with interest rates that are reset through auctions. Oftentimes issued by closed-end funds, auction rate preferred stock typically have their interest rate reset on a schedule that ranges from fourteen days to seven weeks.
Moneyzine EditorNovember 6th, 2024
The term convertible exchangeable preferred stock refers to a security that allows the issuer to exchange it for convertible bonds. Empirical evidence suggests issuing convertible exchangeable preferred stock is oftentimes accompanied by a negative earnings outlook.Moneyzine EditorNovember 6th, 2024- The term participating convertible preferred stock refers to a security commonly issued as part of venture capital financing. Participating convertible preferred stock provides the holder with the rights to both dividends as well as a conversion feature.Moneyzine EditorNovember 6th, 2024
- 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.Moneyzine EditorNovember 6th, 2024
