Definition
The term monthly income preferred stock refers to a security that possesses the features of both preferred stock and bonds. Monthly income preferred stock is considered a hybrid security that dominated the market at one time due to a tax shelter loophole that has since been closed.
Explanation
Monthly income preferred stock (MIPS) is a security issued to the public by a special purpose entity (SPE) created by a parent corporation. These securities typically have a par value of $25.00, and provide the holder with cumulative monthly distributions.
The proceeds received from issuing this preferred stock are lent to the parent company. The interest expense payments the parent makes to the special purpose entity are tax deductible. The proceeds from the interest expense payments received by the SPE are then used to pay the preferred dividend owed to holders of the MIPS.
In the late 1990s, MIPS were extremely popular securities. However, after a long battle with the Internal Revenue Service, the use of MIPS as a tax shelter was no longer acceptable.
Related Terms
The term baby bond refers to indentures and other fixed income securities with a par value that is less than $1,000. The term baby bond can also refer to a series of bonds issued by government entities during the first and second world wars.
Moneyzine EditorJanuary 8th, 2024
The term contingent voting power refers to a right granted to holders of preferred stock when the issuer fails to meet one of its obligations. Contingent voting power provides holders of preferred stock with an additional security feature.Moneyzine EditorJanuary 12th, 2024
The term first-preferred stock refers to a security that has seniority over all other forms of equity issued by a corporation. First-preferred stock receives preferential treatment in terms of dividend payments as well as assets in the event of liquidation.Moneyzine EditorJanuary 18th, 2024- The term private investments in public entities refers to the selling of publicly-traded securities to private investors. Private investments in public entities typically involve the sale of convertible bonds, common or preferred stock.Moneyzine EditorSeptember 21st, 2023
