Why do corporations issue callable preferred stock

The share price is the amount each share is worth at the time of sale. The dividend rate is a fixed amount payable as set out in the prospectus. The dividend rate is based off of the par value of the preferred stock. The call price is the pre-determined price you pay to repurchase the preferred shares.

It is frequently priced higher than the original share price, and may include unpaid dividends. The shareholder cannot refuse to sell, nor can they ask for a higher price. Full ownership rights go back to you, and you no longer need to pay dividends. If the stock would trade on the market at above the call price, then the likelihood of you benefiting from repurchasing the shares -- and therefore actually repurchasing the shares -- increases.

As such, the price appreciation of the stock is effectively capped at the call price. This means that investor demand can be significantly cooled for callable stock when the trading price is close to or above the call price. As a general rule, the price of a bond moves inversely to changes in interest rates.

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How Preferred Stock Works Preferred stock is often described as a hybrid security that has features of both common stock and bonds. Preferred Stock vs Bonds Preferred stock offers consistent and regular payments in the form of dividends, which resemble bond interest payments.

Common Stock vs Preferred Stock Common stock and preferred stock both give the holders ownership of a company. Preferred Stock May Be Convertible To Common Stock If you have preferred shares, one way to take advantage of a degree of capital appreciation is to convert them into common shares.

Preferred securities may provide more attractive yields than securities that have seniority in payment priority. Higher yields compensate investors for the increased risk associated with a lower payment priority. Generally speaking, higher yields are a sign of potentially greater risk. There are a variety of yield calculations that can be used when evaluating a preferred security. Current yield also commonly referred to as "dividend yield" is a commonly used yield calculation for traditional preferred securities.

To calculate current yield, divide the annual interest or dividend payment amount by the current market price of the security and multiply the result by Yield to call, yield to maturity, and yield to worst are yield calculations more commonly used for preferred securities that are debt or have debt-like attributes.

Yield to maturity is the rate of return anticipated if a security is held to maturity date. The calculation of yield to maturity takes into account the current market price, par value, coupon rate, and time to maturity.

It assumes that all coupon payments are reinvested at the same rate. Yield to call is the yield on a security assuming it will be redeemed by the issuer on a specified call date.

The calculation of yield to call takes into account the current market price, call price, coupon rate, and the length of time to the call date. Yield to worst refers to the lowest potential yield anticipated on a security.

You can use Fidelity's Preferred Security Screener to help find financially strong companies with preferred securities that seek to offer above market dividend yields. With a variety of filtering criteria, you can screen for payment, maturity, call and convertibility features, and more.

As the information here explains, preferred securities are more complex than common stock or bonds. And, while they offer higher yields, they also carry additional risks that should be considered before investing. Match ideas with potential investments using our Preferred Securities Screener. Keep in mind that investing involves risk.

The value of your investment will fluctuate over time, and you may gain or lose money. Preferred securities are subject to interest rate risk. As interest rates rise, preferred securities prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities. Preferred securities also have credit and default risks for both issuers and counterparties, liquidity risk, and if callable, call risk.

Dividend or interest payments on preferred securities may be variable, suspended or deferred by the issuer at any time, and missed or deferred payments may not be paid at a future date. If payments are suspended or deferred by the issuer, the deferred income may still be taxable.

See your tax advisor for more details.