Development of the variable rate preferred stock market

Abstract

The Adjustable Rate Preferred (ARP) was invented in 1982. Investors received it at first enthusiastically as an attractive alternative to short-term instruments, expecting it to trade close to par. Over $5 billion were issued within 9 months, mainly by banks, for which it provided a low cost source of primary capital. In early 1983, the ARP market suffered a dramatic setback. Since then, three other preferred stock instruments designed to trade close to par have been brought to market, the Convertible Adjustable Preferred (CAP) in September 1983, the Price Adjusted Rate (PAR) preferred in February 1984, and the Money Market Preferred (MMP) in August 1984. The reasons behind these developments are discussed here, and suggestions are offered for improving the PAR structure.