Why Are Redeemable Preferred Stocks Issued?
Redeemable preferred stocks are a type of equity offering that allows the issuing company to call back the stock at any time. Redeemable preferred stocks are a great way for a company to control its financing costs by taking advantage of falling interest rates.
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Redeemable
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A redeemable preferred stock can be called back by the issuing company. Stock holders are paid when the preferred stock is called by the issuing company. Investors will also get any dividends that are due to them if a preferred stock is called.
Value
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The price at which a company redeems the preferred stock is predetermined when the stock is issued. When making an investment decision, an investor must take into account the benefit he will receive if the stock is redeemed.
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Rate of Return
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Preferred stocks pay dividends. U.S. Treasury bills pay interest and are considered to be a risk-free asset. Investors will buy a preferred stock if the additional rate of return compared to the return of a Treasury bill justifies the additional risk. When a company issues a preferred stock, the dividend must be high enough to compensate investors for the risk they are assuming.
Why Issue?
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When interest rates decline, the dividend that investors demand for the risk of owning a preferred stock will also decline. A company will issue redeemable preferred stocks to take advantage of this. When interest rates decline, the issuing company can redeem the preferred stock and issue new preferred stock with a lower dividend.
Time Frame
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Redeemable preferred stock can be called back by the issuing company at any time. The issuing company must give the investors 30 days' notice before buying back the stock. The majority of companies do not call back preferred stock during the first few years after it was issued.
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References
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