ADJUSTABLE RATE PREFERRED STOCK Meaning and
Definition
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Adjustable rate preferred stock is a type of financial security that represents ownership in a corporation. This stock has characteristics of both common stock and fixed-rate preferred stock. Unlike common stock, which grants voting rights and potential capital appreciation, preferred stock provides shareholders with a fixed dividend payment and priority claim on assets in the event of bankruptcy. However, what sets adjustable rate preferred stock apart is its dividend rate, which is subject to periodic adjustment based on changes in a specified benchmark rate, typically a government bond yield or a short-term interest rate.
The adjustment of the dividend rate is typically set at regular intervals, such as quarterly or annually, and is determined by a predetermined formula. The formula usually involves adding a specified margin to the prevailing benchmark rate. As a result, the dividend rate on adjustable rate preferred stock will rise or fall in response to changes in market interest rates.
Investors are drawn to adjustable rate preferred stock as they provide a potential hedge against inflation and interest rate risk. If market rates rise, the dividend rate on the adjustable rate preferred stock will be adjusted upward, leading to a higher dividend payment. Conversely, if market rates decrease, the dividend rate will be adjusted downward, potentially resulting in a lower dividend payment.
Overall, adjustable rate preferred stock offers investors a unique combination of fixed income and flexibility, allowing for potential income growth depending on changes in interest rates.
