Definition
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.
Explanation
Convertible exchangeable preferred stock allows the issuing company to exchange a non-taxable expense (the preferred dividend) for a taxable expense (the interest expense on bonds). These securities combine two features, one that benefits the issuer and one that benefits the holder:
Exchangeability: at the issuer's discretion, the preferred stock may be exchanged for convertible bonds at a predetermined rate.
Convertibility: at the holder's discretion, the bonds can be converted at a predetermined rate for common stock.
While these securities should be more popular with investors and issuers than preferred stock carrying only one of the above features, their popularity in the market lags behind both exchangeable preferred and convertible preferred.
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 EditorJanuary 8th, 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 EditorSeptember 20th, 2023
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.Moneyzine EditorJanuary 12th, 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 EditorSeptember 21st, 2023
