A convertible preferred stock with an enhanced dividend that is limited in term and participation. Preference equity redemption cumulative stock (PERCS) shares can be converted for shares of common stock in the underlying company at maturity. If the underlying common shares are trading below the PERCS strike price, they will be exchanged at a rate of 1:1; but if the underlying commons are trading above the PERCS strike price, common shares are exchanged only up to the value of the strike price. Taobiz explains Preference Equity Redemption Cumulative Stock - PERCS PERCS are essentially a covered call option structure, and are popular in an environment of declining yields because of the enhanced dividend. Upside profits are limited in order to produce a higher yield. For example, if you own 10 PERCS with a strike price of $50, at maturity the following could happen: -If, at maturity, the underlying asset was trading at $40, you would receive a total of 10 common shares, worth $40 each. -If, at maturity, the underlying asset had doubled and was trading at $100, you would receive only five shares worth $100 each. The total value of the shares ($500) exchanged equals the strike price of $50 x 10 shares.
A privilege extended to select shareholders of a corporation that will give them the right to purchase additional shares in the company before the general public has the opportunity in the event there is a seasoned offering. A preemptive right is written in the contract between the purchaser and the company, but does not function like a put option. Also known as "preemption rights". Taobiz explains Preemptive Right When shareholders, usually a majority shareholder or a shareholder committing large amounts of capital to a startup company, purchase shares, they want to ensure they have as much voting power in the future as they did when they initially invested in the company. By getting preemptive rights in its shareholder's agreement, the shareholder can ensure that any seasoned offerings will not dilute his/her ownership percentage.
A bid entered by a syndicate manager or underwriter in the Nasdaq system to stabilize the price of a Nasdaq security prior to the effective date of a registered secondary offering. The term "penalty bid" is also used. Taobiz explains Pre-Syndicate Bid This is permissible under SEC Rule 10b-7; otherwise the practice is prohibited. Because the bid serves to stabilize the price of the stock, it helps facilitate distribution of the offering. This process is sometimes also referred to as "pegging".
The amount of income a bank or similar type of financial institution earns in a given time period, before taking into account funds set aside to provide for future bad debts. The PPOP will be reduced once the bank deducts the dollar amount of bad debt provisions it determines need to be set aside to cover expected loan defaults, but this is not a cash outflow for the bank. The PPOP simply provides a reasonable estimate as to what the bank expects to have left for operating profit once it eventually incurs cash outflows due to defaulted loans. Taobiz explains Pre-Provision Operating Profit - PPOP Since most banks typically have a large portfolio of loans outstanding to many different customers at any one time, it is simply a matter of time before some of its customers default on their loans. As such, it would be inaccurate for the bank to consider its entire operating profit as income that it will be able to keep. Due to this reality, banks typically report their operating income as a PPOP, to give investors insight into their operating profit, with the understanding that bad debts will still be incurred and reduce the bottom line profit.
A slang phrased that refers to the value of a company's stock before it goes public. The term is often used by venture capitalists. Also known as "pre-money". Taobiz explains Pre-Money Valuation For example let's say Jim's Fabless Donut Shop is thinking of going public. If management and venture capitalists estimate the company will raise $100 million in the IPO, it is said to have $100 million in pre-money. Valuing a company's stock before it goes public is a difficult task. When venture capitalists and entrepreneurs talk about pre-money they have to be very careful not to fall into the trap of "counting their chickens before the eggs have hatched" or, in other words, spending money they don't actually have.
The risk associated with the early unscheduled return of principal on a fixed-income security. Some fixed-income securities, such as mortgage-backed securities, have embedded call options which may be exercised by the issuer, or in the case of a mortgage-backed security, the borrower. The yield-to-maturity of such securities cannot be known for certain at the time of purchase since the cash flows are not known. When principal is returned early, future interest payments will not be paid on that part of the principal. If the bond was purchased at a premium (a price greater than 100) the bond’s yield will be less than what was estimated at the time of purchase. Taobiz explains Prepayment Risk For a bond with an embedded call option, the higher a bond’s interest rate relative to current interest rates, the higher the prepayment risk. For example, on a mortgage-backed security, the higher the interest rate relative to current interest rates, the higher the probability that the underlying mortgages will be refinanced. Investors who pay a premium for a callable bond with a high interest rate take on prepayment risk. In addition to being highly correlated with falling interest rates, mortgage prepayments are highly correlated with rising home values, as rising home values provide incentive for borrowers to trade up in homes or use cash-out refinances, both leading to mortgage prepayments.
A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights. The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as "preferred shares". Watch: What Are Stocks? Taobiz explains Preferred Stock There are certainly pros and cons when looking at preferred shares. Preferred shareholders have priority over common stockholders on earnings and assets in the event of liquidation and they have a fixed dividend (paid before common stockholders), but investors must weigh these positives against the negatives, including giving up their voting rights and less potential for appreciation.
Preferred stock with special provisions limiting the value of its convertible shares and the mandatory redemption value at maturity. Taobiz explains Preferred Equity Redemption Stock - PERC PERCs generally offer a higher yield than common stocks. However, they can be called at any time, generally at a higher price than the cap price. When the PERC matures, it must be redeemed into either cash or underlying shares.
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