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Callable preferred stock is issued with the option of being repurchased by the company sometime in the future. This is favorable for a company. If preferred stock is issued at a fixed rate of 8%, and then interest rates drop to 5%, the company has the option of repurchasing its higher-interest shares and issuing new shares at a lower rate. Investors experience a greater risk with callable preferred shares, because they may lose their high dividend payments at any time.
Because of this risk, callable preferred shares are generally issued with a higher interest rate than other preferred shares. In addition, when the company repurchases the shares, it will pay a premium to compensate for the dividend payments that the shareholder will no longer receive, for example, XYZ callable preferred shares worth $60 per share will be repurchased by the company for $62 per share, a $2 premium.
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