Convertible Adjustable Preferred Stock (CAPS)

Definition

The term convertible adjustable preferred stock refers to a floating rate security with an interest rate that is indexed to Treasury securities.  Convertible adjustable preferred stock can be converted by the holder on the dividend payment date.

Explanation

Also known as capital market preferred stock (CMPS), convertible adjustable preferred stock (CAPS) provides investors with a floating rate that is typically indexed to a Treasury security.  The holder of these shares has the option to convert the CAPS to common stock on the dividend payment date.

The number of common shares received is equal to the par value of the preferred.  This mechanism provides the investor with a preservation of capital feature in the event the credit rating of the issuer was to decline.  Issuers will normally place a cap on the number of shares received upon conversion.  This protects the issuer from a change in control in the event the price of the issuer's common stock drops to unusually low levels.

Related Terms

auction rate preferred stock, convertible exchangeable preferred stock, participating convertible preferred stock, preferred equity redemption stock