- Which of the following types of preferred shares has the most risk for investors?
A. Putable shares.
B. Callable shares.
C. Non-putable, non-callable shares.
Shouldn’t it be putable shares?
Kaplan book 3 page 292
three questions:
what was the `official’ answer (along with the official rationale)?
who calls callable preferred shares? (meaning the issuer, the investor, or a 3rd party)?
who puts putable preferred shares? (same choices)
(and a 4th question I suppose. I’ve seen both putable and puttable (1 t versus 2 t’s) over the years.
I have no idea which is more correct/common/whatever and the spellcheck on this site says both are wrong. Does anyone know?)
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I would assume that embedded options on preferred stock are similar to embedded options on corporate bonds, in which the investor will benefit from a put option (investor has the right to sell the preferred shares back to the issuer), and the issuer will benefit from a call option (issuer has the right to repurchase the shares back from the investor).
By that logic, I am going with B as the correct answer, as an investor in a callable preferred share has the risk of the shares being called back by the issuer, on top of the other standard risks that come with preferred stock.
Also as for your second question, I have never seen “putable” with two Ts, but yet again I never have to deal with derivatives in my job, so maybe there is some place or some field in finance where they use two.
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the first 3 questions were aimed at the OP to try to get him to realize that callable preferred stock is callable by the issuer so that investor runs the risk of his preferred shares being called whereas puttable preferred stock is puttable by the investor so that the put feature is a right not a risk.
I’m still waiting for him to post the official answer (along with the official rationale) because he appears to disagree with it and it would help him if someone explained the issue to him.
As to my fourth question, Google doesn’t seem to be giving me the number of search results found at the moment, but Bing tells me that it’s almost 50-50 with putable holding a slight edge, 851k results for putable and 793k for puttable, that’s 51.76% vs 48.24%
The argument for puttable with 2 t’s is that English has some standard pronunciation rules, according to which putable with 1 t should be pronounced as pew-table with a long u as in computer or reputable,
and to get the pronunciation we want, which is a short u as in putting or gutter, it should have 2 t’s.
That’s why we write “putting the cat out” rather than “puting the cat out”
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- “2. B Callable shares are the most risky because if the market price rises, the firm
can call in the shares, limiting the investor’s potential gains. Putable shares are
the least risky because if the market price drops, the investor can put the
shares back to the firm at a predetermined price. The risk of non-putable, noncallable
shares falls in between. (LOS 44.e)”
2.The issuer can call back the share, therefore, the investor will require a higher yield on it due to a higher risk. - Same
- I don’t think I’ve seen “puttable” at uni or in CFA litterature if that gets you any wiser.
That makes perfect sense. Thanks!
Oh sorry, I thought you were asking a genuine question, haha.
I wouldn’t stress about the correct spelling though. English is almost never phonetically consistent.
I don’t think anyone’s stressed, and actually English is almost always phonetically consistent, which is why decades ago schools used to teach rules like this to kids.