Definition: Call price is the value at which a corporation can purchase and retire preferred stock from its callable preferred shareholders.
What Does Call Price Mean?
Preferred stock comes with many benefits and a few shortfalls. One of the benefits of having preferred stock is the preferential dividend treatment. When the company calls a dividend it must pay the preferred dividends first. Cumulative preferred stock also gives the shareholder the right to accrue dividends in arrears.
Basically, if a company decides not to issue dividends to these shareholders, the company has to write an IOU (dividends in arrears) and pay the dividends at a later date.
Example
One option that can be viewed as a shortfall of preferred stock is the callable option. If a share of preferred stock is callable, the corporation has the right to purchase/retire or “call” the stock from its shareholders at a specific future time and price usually determined at issuance. This price is called the call price or redemption value of the callable preferred stock. Most of the time a call price not only includes the stocks’ par value, but it also includes a premium, so the shareholder will get a little more return on his investment.
If you are really lucky, the call price will also include an option to pay all dividends in arrears before the corporation buys your stock. So if your corporation called your preferred shares, you could receive the par value, plus a premium, plus all the dividends they haven’t paid you yet. Not too bad of a deal, huh?
