Preferred stock is a hybrid security; it has some of the characteristics of stock and some of the characteristics of bonds. Historically, preferred stock has not been a popular means of financing. In the past few years, however, it has become more attractive to companies and individual investors alike, and investors are buying large amounts because of high yields. Large preferred stock issues have been made by such banks as Chase, Citibank, HSBC Bank USA, and Wells Fargo, as well as by other companies. The dividends yields on these stocks are over 9 percent, higher than the interest rates on bonds of comparable risk.16 Especially popular are preferred equity redemption convertible stocks, or PERCs, which are automatically convertible into common stock after three years if the company does not call them first and retire them. What reasons can you give for the popularity of preferred stock, and of PERCs in particular, when the tax-deductible interest on bonds is lower? Discuss from both the company’s and the investor’s standpoint.

Purposes of Treasury Stock