Callable shares

Examples of Callable shares in the following topics:

• Provisions of Preferred Stock

  • Convertible preferred stock can be exchanged for a predetermined number of company common stock shares.
  • Often times companies will keep the right to call or buy back preferred shares at a predetermined price.
  • These shares are callable shares.
  • Almost all preferred shares have a negotiated, fixed-dividend amount.
  • Dividends are one of the privileges of stock ownership, and preferred shares get more rights to them than common shares do.

• Preferred Stock Rules and Rights

  • Preferred stock can include rights such as preemption, convertibility, callability, and dividend and liquidation preference.
  • Preferred stock is a special class of shares that may have any combination of features not possessed by common stock.
  • The following features are usually associated with preferred stock: Preference in dividends preference in assets, in the event of liquidation, convertibility to common stock, callability, and at the option of the corporation.
  • Some preferred shares have special voting rights to approve extraordinary events (such as the issuance of new shares or approval of the acquisition of a company) or to elect directors, but, once again, most preferred shares have no voting rights associated with them.
  • Some preferred shares gain voting rights when the preferred dividends are in arrears for a substantial time.

• The Cost of Preferred Stock

  • Preferred stock may also be callable or convertible, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason - usually for a premium - or convert the shares to common stock.
  • With preferred shares, investors are usually guaranteed a fixed dividend forever.
  • Sometimes, dividends on preferred shares may be negotiated as floating - they may change according to a benchmark interest rate index.

• Issuing Stock

  • The amount of issued stock is based on a company's authorized shares, or the maximum number of shares authorized for issue to shareholders.
  • Issued shares are the sum of outstanding shares and treasury stock, or stock reacquired by the company.
  • Owning common stock tends to be riskier than owning preferred stock; yet over time, common shares on average perform better than preferred shares or bonds.
  • Similar to bonds, preferred shares are rated by credit-rating companies and are also callable by the company.
  • Each share type is reported at market value at the time the shares are purchased by investors, which is also the point in time when shares become outstanding.

• Call Provisions

  • Call dates are the dates on which callable bonds can be redeemed early.
  • A European callable has only one call date.
  • This is a special case of a Bermudan callable.
  • Most callable bonds allow the issuer to repay the bond at par.
  • With a callable bond, investors have the benefit of a higher coupon than they would have had with a straight, non-callable bond.

• Preferred Stock

  • Preferred stock (also called preferred shares, preference shares or simply preferreds) is an equity security with properties of both an equity and a debt instrument , and is generally considered a hybrid instrument.
  • It is senior (i.e. higher ranking) to common stock, but subordinate to bonds in terms of claim (or rights to their share of the assets of the company).
  • Details with regards to the rights associated with preferred stock will vary with the business entity that issues the shares, and preferred stock can come in a number of different classes.

• Stock Warrants

  • Premium (the extra amount paid for the shares when exercising the warrant as compared to the market price paid when acquiring the stock through the open market)
  • Leverage (risk exposure to the underlying shares acquired through the warrant as compared to the risk exposure of shares purchased in the open market)
  • There are many types of stock warrants -- equity, callable, putable, covered, basket, index, wedding, detachable, and naked warrants.
  • They are valued at their exercise price multiplied by the specified number of common shares the warrant provides.

• Accounting for Preferred Stock

  • issuing so many additional shares of common stock that earnings per share are less in the current year than in prior years; and
  • Therefore, the firm fixes the dividend per share.
  • For no-par preferred stock, the dividend is a specific dollar amount per share per year, such as USD 4.40.
  • Holders of convertible preferred stock shares may exchange them, at their option, for a certain number of shares of common stock of the same corporation.
  • The par value, authorized shares, issued shares, and outstanding shares is disclosed for each type of stock.

• Deciding to Refund Bonds

  • Refunding occurs when an entity that has issued callable bonds calls those debt securities to issue new debt at a lower coupon rate.
  • Refunding occurs when an entity that has issued callable bonds calls those debt securities from the debt holders with the express purpose of reissuing new debt at a lower coupon rate.
  • On the contrary, nonrefundable bonds may be callable, but they cannot be re-issued with a lower coupon rate (i.e., they cannot be refunded).

• Sinking Funds

  • The firm may repurchase a fraction of outstanding bonds at a special call price associated with the sinking fund provision (they are callable bonds).
  • However, if the bonds are callable, this comes at a cost to creditors, because the organization has an option on the bonds: The firm will choose to buy back discount bonds (selling below par) at their market price,while exercising its option to buy back premium bonds (selling above par) at par.
  • In this case, the firm's gain is the bondholder's loss–thus callable bonds will typically be issued at a higher coupon rate, reflecting the value of the option.