equity, accounting, debtWhat is the main difference between callable and redeemable preferred shares?
Also, what could be the effects on assets, liabilities, and equity?
It’s clearly the same, it’s two terms to designate the same stock.
See the definition.
So you don’t have to choose between one or the other.
Definition
A callable preferred stock is a type of preferred stock in which the issuer has the right to call in or redeem the stock at a preset price after a defined date. The terms of a callable preferred stock issue, such as the call price, the date after which it can be called, and the call premium (if any) are all defined in the prospectus at the time of issue and cannot be changed later. As with regular preferred shares, dividends on callable preferred shares must be paid by the issuer ahead of any dividends on its common shares. Also known as “redeemable preferred stock” or “callable preferred shares.”
As was already stated, they are essentially the same thing from a finance point-of-view. There might however be a tiny, nuanced difference if you really want to get into defining the act of “calling” and the act of “redeeming” securities like preferred stock.
The act of calling is very well defined in finance. Calling is exercised strictly by the holder of an option to buy. Upon calling preferred shares, the buyer must pay a certain amount (strike) to the seller (the investor). The buyer of the preferred stock must be the issuer, must have the option (but not the obligation) to call, and must pay a certain amount.
The act of redeeming is much less strictly defined. Depending on the terms of the issue, a redemption could be triggered by the issuer or the investor or even a third party, act of God, or some other circumstance. In fact, a redemption could have terms that are tied to a nearly unlimited number of defined situations and/or conditions. A redemption could also be required, and might not be strictly optional like a call. The act of calling is a redemption, but a redemption might not be a call.
So a redeemable preferred stock should give the issuer more flexibility in defining the terms of an issue. Perhaps the redemption could be triggered when a major shareholder dies or a business opportunity expires. Callable preferred shares imply a lot more standardization of the basic features in an issue.
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