Fixed to Float Preferred Stock

[Richard4444]

I have been reading about Preferred Stocks that are 'Fixed to Float,' that is, they have a fixed interest rate (typical would be ~ 4 -6 %) and a date upon which the interest rate floats (Libor + x%) and are usually callable upon that date. Therefore, the interest rate risk is not the same as a perpetual preferred stock. This seems like a fairly safe (many are BBB+) conservative instrument. Any opinions? Thanks !

 

[clifp]

I am not sure they are much better than regular preferred stock. If interest rates go down and/or the credit rating of the firm goes up, they call the bond. If the credit rating of firm goes down and/or interest rates go up, they pay the floating rate.

One thing is sure the firm will do what is in the best interest of firm regard interest rates. The thing to understand as the buyer of a preferred stock you are assuming both credit risk and interest rate risk when you purchase a preferred stock. Now as long as you are compensated for the risk no problem..


Personally, I'd only pay a modest premium perhaps 25 basis points lower yield to have such a feature vs a fixed rate preferred.

 

[haha]

I have been reading about Preferred Stocks that are 'Fixed to Float,' that is, they have a fixed interest rate (typical would be ~ 4 -6 %) and a date upon which the interest rate floats (Libor + x%) and are usually callable upon that date. Therefore, the interest rate risk is not the same as a perpetual preferred stock. This seems like a fairly safe (many are BBB+) conservative instrument. Any opinions? Thanks !

if I understood what you said, you will get to keep it if it is a dog, but they will call it away if their position has strengthened.

Sounds not too appealing.

Ha

 

[Richard4444]

It seems to function like a bond and then goes with a floating interest rate to offset the long term interest rate risk. So as part of the Bond AA, in the case of one going from 5% fixed (for 4 years) then switching to Libor + 3% float, for 4 years one gets 5% and then Libor +3% which should be fairly similar and the price of the bond doesn't fluctuate much. Sounds reasonable to me as opposed to a long term bond. <--- Still learning

 

[MichaelB]

It seems to function like a bond and then goes with a floating interest rate to offset the long term interest rate risk. So as part of the Bond AA, in the case of one going from 5% fixed (for 4 years) then switching to Libor + 3% float, for 4 years one gets 5% and then Libor +3% which should be fairly similar and the price of the bond doesn't fluctuate much. Sounds reasonable to me as opposed to a long term bond. <--- Still learning

More like a stock with a variable dividend, tied to an interest rate index. The market value of a preferred stock is much less stable than the market value of a bond with similar rate of return.

 

[2B]

Individual preferreds have the same risk as individual stocks with usually much less upside. I used to have some in my fixed income portfolio but 2008 cured me of that. I didn't end up losing much money but "safe" became less assured. And, safe was the purpose fo the fixed income portion.