The term adjustable rate preferred stock refers to a security that varies the level of dividends paid with a benchmark. The rate of dividends paid typically resets on a quarterly basis, and the most common benchmark is the Treasury bill.
Also known as variable rate preferred stock, adjustable rate preferred stock (ARPS) includes those securities that vary the level of dividend paid as interest rates rise and fall. The dividend payment is determined using a predetermined formula and a benchmark such as the rate of interest paid on T-bills.
The market value of fixed rate preferred stock will usually vary with interest rates over time. As interest rates fall, the value of the preferred stock will rise. If interest rates increase, the value of the preferred stock will decline. The market value of variable rate preferred stock is much more stable. If interest rates increase, the dividend on these securities increases too, thereby insulating the security's market value from changes in interest rates.
In addition to stabilizing the value of these securities, the holders of preferred stock are the first eligible to receive dividend payments in the event the company experiences short term financial distress. The stability of market value as well as the preference with respect to dividends, makes these securities very attractive to investors seeking a reliable source of income in addition to preservation of capital.