• Skip to primary navigation
  • Skip to main content
  • Skip to footer
WallStreetMojo

Wallstreet Mojo

Wallstreet Mojo

MENUMENU
  • Resources
        • Accounting Basics

          • Income Statement
          • Balance Sheet
          • Cash Flow in Accounting
        • Accounting-Basics
        • Accounting Concepts

          • Assets in Accounting
          • Liabilities in Accounting
          • Shareholders Equity
        • Accounting-Concepts
        • Accounting Careers

          • Accounting Interview Q&A
          • Financial Accounting Careers
          • Cost Accounting
        • Accounting-Careers
        • Financial Statement Analysis

          • Ratio Analysis
          • Profitability Ratios
          • Turnover Ratios
        • Financial-Statement-Analysis
        • Investment Banking Guides

          • Investment Banking
          • What is LBO?
          • What is Pitch Book?
        • Investment-Banking-Guides
        • Others

          • Resources (A to Z)
          • Equity Research
          • Corporate Finance
          • Financial Modeling
          • Financial Certifications
          • Valuation
  • Free Courses
  • All Courses
        • Certification Courses

          Certificate
        • All in One Financial Analyst Bundle

          Financial-Analyst-Bundle
        • Accounting Course

          Accounting-Course
        • US GAAP Course

          US-GAAP-Course
        • Others

          • Cost Accounting Course
          • IFRS Course
          • Equity Research Course
          • Finance for Non finance

          • Financial Modeling Course
          • Business Valuation Course
          • Investment Banking Course
          • View All
  • 250+ Courses All in One Bundle
  • Login

Callable Preferred Stock

Home » Accounting » Shareholders Equity » Callable Preferred Stock

By Jyoti Singh Leave a Comment

Callable Preferred Stock

Callable preferred stock is the stock where the issuer of such stock enjoys the right to repurchase such issued stock after the pre-decided date at a specific price mentioned in the terms of prospectus while issuing stock and such price cannot be changed later at any time or at the time of redemption.

Callable Preferred Stock Definition

Callable Preferred Stock is a type of preferred stock that gives the issuer the right to call or redeem the stock at a pre-set price after a pre-determined date. Also known as callable preferred shares, it is a popular means for financing large-scale organizations as it uses a combination of debt and equity financing. Such shares may also be traded on the stock markets as well.

How Callable Preferred Stock Works?

Company ‘R’ issued preferred stock in 2005, paying 12% rate and maturing in 2025 and also callable in 2015 at 103% of par value. Ten years from the issue, ‘R’ gains the right to call the stock, which it may consider if the interest rates in 2015 fall below 12%.

Popular Course in this category
Cyber Monday Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) 250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
4.9 (1,067 ratings)
Course Price

View Course

Related Courses
Accounting CourseUS GAAP CourseCost Accounting Course

Generally, the issuer must pay the investor more than the par value of the stock for calling the issue. This difference is termed as ‘Call Premium’ and this amount typically decreases as the preferred stock is coming close to maturity. Say Company ‘R’ will offer the stock at 103% of face value if the call is issued in 2015 but it may offer only 102% if called in 2020.

Features of Callable Preferred Stock

There are some important features of such stocks:

  • Owners bear the risk of being called back and the strike-price premium is meant to compensate the holder for certain or all of the risks.
  • These stocks certainly pay a dividend regularly to keep the shareholders attracted. However, it can be challenging for investors who depend on the same as a source of income.
  • It should be noted that the price of callable preferred stock is impacted by whether the call is in-the-money, out of the money or at the money.
  • In terms of dividend and liquidation, they get preference over the common stockholders.
  • These stocks can be issued as Cumulative, Participating, Callable and Convertible.

Benefits of Callable Preferred Stock

  • Since the shares can be repurchased after the call date, issuers can permanently avoid a situation of giving up a majority interest in the company. This aspect can give them an upper hand during crisis situations.
  • Voting control can be maintained as preferred shares are classified as non-voting shares.
  • The funding costs can be kept under control.
  • Common shares can be made available for equity incentive plans.
  • The call price for repurchasing of the shares at the time of prospectus execution. This allows organizations to strategize the timing of call when they have surplus cash with them.

Drawbacks of Callable Preferred Stock

  • Investors may be unwilling to pay as much as equity subject to call.
  • The perceived value of the callable preferred stock is unlikely to be higher since they have less potential for the upswing. Therefore, investors who are anticipating a bullish market/stock must cash in on such shares before the issuer announces a call. A call announcement generally plummets the share value towards the par value. It sends a signal that there could be some issues in the management and such a step is required to be taken.
  • Another angle highlights the ‘call price premiums’ which guarantee a return even if the market is underperforming. This may be a costly option but investors should consider such options if their investment objective involves consistent returns.
  • The addition of security classes can complicate the corporate structure which further imposes compliance costs. This can further expose loopholes in the funding structure.
  • Dividends to the common shareholders will not be considered unless preferred shareholder dividends are paid incomplete. Callable preferred stock can generally be a problem if you offer high dividend rates for preferred stock shareholders.
  • If the call price turns out to be lower than the existing market price, the investor loses part or entire capital gains if the firm decides to call the shares.

Conclusion

The option of a callable preferred stock shall be considered if the organization is currently exploring financing options for a new unit/firm and desire to avoid the complexities in equity and debt financing. Though the procedure of repurchasing the shares is easy as the conditions are laid down during inception and only notice must be sent to the relevant shareholders with essential details. However, since premium has to be offered at the time of the call, issuers must ensure they have sufficient cash balance with them which could be at the cost of other opportunities to the firm. Such a step also has an impact on the share price and put a cap on the same. Thus, all these aspects must be considered before arriving at any decision.

Recommended Articles

This has been a guide to Callable Preferred Stock and its definition. Here we discuss how callable preferred stocks work along with its features, benefits & drawbacks. You can learn more about financing from the following articles –

  • Example of Phantom Stock
  • Share Classes
  • What is Participating Preferred Stock?
  • Non-Cumulative Preference Shares Meaning
  • Calculate Cost of Preferred Stock
  • Redeemable Preference Shares Meaning
7 Shares
Share
Tweet
Share

Filed Under: Accounting, Shareholders Equity

Reader Interactions
Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Footer
COMPANY
About
Reviews
Blog
Contact
Privacy
Terms of Service
FREE COURSES
Free Finance Online Course
Free Accounting Online Course
Free Online Excel Course
Free VBA Course
Free Investment Banking Course
Free Financial Modeling Course
Free Ratio Analysis Course

CERTIFICATION COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Business Valuation Course
Equity Research Course
CFA Level 1 Course
CFA Level 2 Course
Venture Capital Course
Microsoft Excel Course
VBA Macros Course
Accounting Course
Advanced Excel Course
Fixed Income Course
RESOURCES
Investment Banking
Financial Modeling
Equity Research
Private Equity
Excel
Books
Certifications
Accounting
Asset Management
Risk Management

Copyright © 2019. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

Free Accounting Course

You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!

By continuing above step, you agree to our Terms of Use and Privacy Policy.

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.

* Please provide your correct email id. Login details for this Free course will be emailed to you

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.

* Please provide your correct email id. Login details for this Free course will be emailed to you

WallStreetMojo

Free Accounting Course

You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!

By continuing above step, you agree to our Terms of Use and Privacy Policy.

* Please provide your correct email id. Login details for this Free course will be emailed to you

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.

* Please provide your correct email id. Login details for this Free course will be emailed to you

CYBER WEEK OFFER - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More