An analysis of the adjustable rate preferred stock.
Item
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Title
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An analysis of the adjustable rate preferred stock.
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Identifier
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AAI9521289
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identifier
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9521289
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Creator
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Lee, Kwok Yu.
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Contributor
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Adviser: Ashok Vora
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Date
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1995
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Language
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English
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Publisher
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City University of New York.
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Subject
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Economics, Finance
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Abstract
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In this dissertation, the distinctive characteristics of the Adjustable Rate Preferred Stocks (ARPS) are identified and analyzed. The most intricate aspect is the determination of quarterly dividends. The dividend rate is indexed to the maximum of three interest rates and is subject to a floor and a ceiling. Thus, the dividend is a "collared" option on the maximum of three values. In addition, the firm has an option to redeem the ARPS five years after the issuing date. Two valuation models, the benchmark model and the option-based valuation model, are developed. The benchmark model values the ARPS like fixed rate preferred stocks while the option-based valuation model synthesizes the expected dividend of the ARPS as a portfolio of options and incorporates the option on the maximum of three "assets." Empirical tests of the cross-sectional and time-series ARPS implied risk premia re- veal that the rating of the ARPS, the tax regime, the industry of the ARPS issuer, the level of the risk free rate, and the volatility of the risk free rate have significant effect on the risk premium, thus the price of the ARPS. Tests of model prices versus market price show that the option-based valuation model performs slightly better than the benchmark model.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
