Adjustable rate preferred stock
Also known as: adjustable preferred stock, variable rate preferred stock
Adjustable rate preferred stock is preferred stock whose dividend rate resets periodically based on a benchmark interest rate, such as the Treasury bill rate. The floating dividend keeps its market price more stable than fixed-rate preferred stock.
Adjustable rate preferred stock is a type of preferred stock that pays a dividend tied to a benchmark interest rate instead of a fixed percentage of par value. At set intervals — commonly each quarter — the dividend resets according to a formula based on a reference rate such as the Treasury bill rate, often within a stated minimum and maximum (a collar).
The floating dividend changes how the security behaves in the market. A traditional fixed-rate preferred paying 6% of par becomes less attractive when market rates rise, so its price falls — the same inverse relationship bonds exhibit. Because an adjustable rate preferred's dividend moves with market rates, its price tends to stay close to par. Rising rates simply produce a bigger dividend at the next reset rather than a capital loss.
The trade-off runs in both directions. When market rates fall, the dividend falls with them, so holders give up the locked-in income a fixed-rate preferred would have provided. Adjustable rate preferreds therefore suit income investors who prioritize price stability over predictable payments.
Preferred stock features are core testable material on securities exams. The Series 7 and Series 65 exams both expect you to distinguish adjustable rate preferred from its fixed-rate, cumulative, participating, callable, and convertible cousins — and to recognize that the adjustable variety carries the least interest rate risk of the group precisely because its dividend resets with the market.
Key takeaways
- Adjustable rate preferred stock pays a dividend that resets periodically based on a benchmark rate, such as the Treasury bill rate.
- Because the dividend floats with market rates, its price is more stable than that of fixed-rate preferred stock.
- Falling rates shrink the dividend, so holders trade income certainty for price stability.
- On the Series 7 and Series 65 exams, remember it carries the least interest rate risk of the preferred stock types.