Definition:
Callable preferred stock is a type of preferred stock that the issuer has the option to redeem or call back before its stated maturity date. This means the issuer can repurchase the preferred stock from the shareholders at a predetermined price.
Key characteristics of callable preferred stock:
- Call provision: The issuer has the right to call the preferred stock.
- Call price: The price at which the issuer can call the preferred stock.
- Call premium: The call price is typically at a premium to the par value of the preferred stock.
- Investor risk: Callable preferred stock carries the risk that the issuer may call it early, limiting the potential return for investors.
Why do issuers issue callable preferred stock?
- Flexibility: Callable preferred stock provides the issuer with flexibility to retire the stock and reduce its equity obligations.
- Lower cost of capital: Issuing callable preferred stock can sometimes result in a lower cost of capital compared to non-callable preferred stock.
Why do investors buy callable preferred stock?
- Higher yield: Callable preferred stock often offers a higher dividend rate than non-callable preferred stock to compensate investors for the call risk.
- Potential for early redemption: Investors may benefit from early redemption if the issuer calls the stock and they receive the call price.
However, it’s important to note that callable preferred stock carries the risk of early redemption, which can limit the potential return for investors.
In essence, callable preferred stock is a type of preferred stock that the issuer has the option to redeem early, and it offers investors a higher yield but also carries the risk of early redemption.
