Study guide
5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset
Canadian Securities Course CSC
Track your progress as you read
Finished sections get a check mark.
1 Introduction & Exam Overview
About the CSC Exams
2 Chapter 1: The Canadian Investment Marketplace
1.1 The Canadian Securities Industry & the Investment Dealer's Role 1.2 Financial Intermediaries: Banks, Trusts, Credit Unions, Insurers & Pension Funds 1.3 Financial Market Trends 1.4 Investment Capital, Financial Instruments & Financial Markets 1.5 Canadian Exchanges, ATSs, Dark Pools & the Order Protection Rule 1.6 Canadian Securities Regulators, the CSA & CIRO 1.7 Investor Protection: OSFI, CIPF and CDIC 1.8 Ethics, Standards of Conduct & the Client Focused Reforms 1.9 Conflicts of Interest, Complaint Handling & Remediation
3 Chapter 2: The Economy
2.1 Economics Foundations & Measuring Economic Growth 2.2 The Business Cycle & Economic Indicators 2.3 Inflation & Interest Rates 2.4 The Labour Market & Unemployment 2.5 The Bank of Canada & the Inflation-Control Target 2.6 Implementing Monetary Policy: The Operating Band, Market Operations & Transmission 2.7 Fiscal Policy, Deficits & the Challenges of Government Policy 2.8 International Finance & Trade: The Balance of Payments and the Canadian Dollar
4 Chapter 3: Features and Types of Fixed-Income Securities
3.1 The Fixed-Income Marketplace, Bond Terminology & Security 3.2 Protective Covenants, Retirement Provisions & Extendible/Retractable Features 3.3 Government of Canada Securities: T-Bills, Marketable Bonds & RRBs 3.4 Provincial & Municipal Debt and Strip Bonds 3.5 Corporate Bonds, Credit Spreads & Bond Ratings 3.6 Money Market Instruments, Floating-Rate Notes & International Bonds 3.7 Other Fixed-Income Securities & Reading Bond Quotes
5 Chapter 4: Pricing and Trading of Fixed-Income Securities
4.1 Bond Pricing, Price–Yield Relationships & Accrued Interest 4.2 Yield Calculations & Return Measures 4.3 The Term Structure of Interest Rates & Yield Curve Theories 4.4 Fundamental Bond Pricing Properties: Volatility Rules, Duration & Convexity 4.5 Bond Market Trading & Bond Indexes
6 Chapter 5: Common and Preferred Shares
5.1 Common Shares: Ownership Rights, Voting & Restricted Shares 5.2 Dividends, DRIPs, Stock Splits & Consolidations 5.3 Preferred Shares: Features, Cumulative Dividends & Taxation 5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset 5.5 Fundamental Equity Metrics & Ratios 5.6 Stock Indexes & Averages
7 Chapter 6: Equity Transactions
6.1 Order Types, Execution & Market Mechanics 6.2 Margin Trading: Long Accounts & Borrowing 6.3 Short Selling & Short-Margin Requirements 6.4 Trading & Settlement Procedures: T+1, CDS & Confirmations
8 Chapter 7: Derivatives
7.1 Derivatives: Role, Underlying Assets & Users 7.2 Options Fundamentals: Calls, Puts & Moneyness 7.3 Option Strategies & Risk Management 7.4 Forward & Futures Contracts 7.5 Rights & Warrants
9 Chapter 8: Corporations and their Financial Statements
8.1 Corporate Structures & Corporate Governance 8.2 The Annual Report, Accounting Standards & the Auditor's Report 8.3 The Balance Sheet & Income Statement 8.4 The Cash Flow Statement & Earnings Quality 8.5 Public Company Disclosure, Investor Rights, Take-Over Bids & Insider Trading
10 Chapter 9: Financing and Listing Securities
9.1 Government & Corporate Financing: Underwriting and Syndicates 9.2 The Prospectus Process, Stabilization & Purchaser Rights 9.3 The Exempt Market & Private Placements 9.4 The Listing Process: TSX, TSXV & Capital Pool Companies 9.5 Continuous Disclosure, Material Changes & Insider Reporting
11 Chapter 10: Investment Analysis
10.1 Methods of Equity Analysis & Macroeconomic Analysis 10.2 Fundamental Industry Analysis 10.3 Company Analysis: Competitive Advantages, Governance & the Dividend Discount Model 10.4 Discounted Cash Flow & Relative Valuation Multiples 10.5 Financial Statement Ratio Analysis 10.6 Assessing Preferred Share Investment Quality 10.7 Technical Analysis: Charts, Trends & Patterns 10.8 Technical Indicators, Volume, Breadth & Sentiment
12 Chapter 11: Portfolio Analysis
11.1 Measuring Investment Return 11.2 Measuring Risk: Types of Risk, Standard Deviation & Downside Measures 11.3 Portfolio Risk & Return: Correlation and Diversification 11.4 Beta, the Capital Asset Pricing Model & the Security Market Line 11.5 Portfolio Manager Styles: Equity & Fixed Income 11.6 The Portfolio Management Process: Objectives, Constraints & the IPS 11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing
13 Chapter 12: Alternative Investments, Other Managed, and Structured Products
12.1 Alternative Investments: Structures, Fees & Liquid Alternatives 12.2 Alternative Strategies, Performance Measurement & Due Diligence 12.3 Segregated Funds, Labour-Sponsored Funds & Listed Private Equity 12.4 Income Trusts, REITs & Closed-End Funds 12.5 Structured Products: PPNs & Market-Linked GICs 12.6 Split Shares & Asset-Backed Securities
14 Chapter 13: Mutual Funds
13.1 Managed Products & Mutual Fund Structure 13.2 Pricing Mutual Fund Units: NAVPS & Forward Pricing 13.3 Mutual Fund Fees, Sales Charges & Unit Series 13.4 Mutual Fund Regulation, Fund Facts & Account Opening 13.5 Types of Mutual Funds & Fund Management Styles 13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance
15 Chapter 14: Exchange-Traded Funds (ETFs)
14.1 ETF Origins, Structure, Tax Efficiency & ETF Facts 14.2 ETF Creation, Redemption & Arbitrage 14.3 Types of ETFs & Advanced Strategies 14.4 Comparing ETFs, Mutual Funds & Individual Securities
16 Chapter 15: Working with the Institutional Client
15.1 The Institutional Marketplace & Institutional Clients 15.2 Institutional Investment Guidelines, Styles & Restrictions 15.3 Buy Side & Sell Side: Trading Desks, Revenue, Clearing & Best Execution 15.4 Block Trading, Dark Pools & Algorithmic Trading
17 Chapter 16: Fee-Based Accounts and Working with the Retail Client
16.1 Fee-Based Accounts: Managed & Non-Managed Models 16.2 Fee Transparency, CRM2 & Total Cost Reporting, and MWRR vs. TWRR 16.3 The Financial Planning Approach & the Life Cycle 16.4 Behavioral Finance, Sequence-of-Returns Risk & Client Coaching 16.5 Estate Planning Basics
18 Chapter 17: Canadian Taxation
17.1 The Canadian Taxation System 17.2 Taxation of Investment Income 17.3 Capital Gains, Losses & The Superficial Loss Rule 17.4 Registered vs Non-Registered Tax-Advantaged Accounts 17.5 Tax Planning Strategies, Pension Plans & the RDSP
5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset
Key Takeaways Explain This Topic AI
Conversion ratio = par value ÷ conversion price; parity price of the preferred = common share price × conversion ratio.
A call feature benefits the issuer; a retraction feature lets the holder sell the shares back at par, which supports the price when rates rise.
Floating-rate preferreds reset their dividend to short-term rates, so their prices stay near par.
Rate-reset preferreds reset every five years to the 5-year Government of Canada yield plus a fixed spread, and holders may switch to a floating-rate series.
Last updated: October 2026
Preferred Share Variations
Issuers add features to preferred shares to suit their financing needs and to attract investors. Each feature changes the share's risk, income and price behaviour. The cumulative feature was covered with the basics; the main remaining variations follow.
2. Convertible Preferred Shares
Convertible preferred shares grant the investor the option to convert their preferred shares into a predetermined number of common shares of the same issuing corporation.
Conversion Ratio: The number of common shares received upon exercising the conversion feature for one preferred share:
Conversion Ratio = Par Value of Preferred Share Conversion Price \text{Conversion Ratio} = \frac{\text{Par Value of Preferred Share}}{\text{Conversion Price}} Conversion Ratio = Conversion Price Par Value of Preferred Share
Parity Price of Preferred: The theoretical market value of the preferred share based solely on the current market value of the underlying common stock:
Parity Price of Preferred = Market Price of Common × Conversion Ratio \text{Parity Price of Preferred} = \text{Market Price of Common} \times \text{Conversion Ratio} Parity Price of Preferred = Market Price of Common × Conversion Ratio
Parity Price of Common: The common share price required to match the current market price of the convertible preferred share:
Parity Price of Common = Market Price of Preferred Conversion Ratio \text{Parity Price of Common} = \frac{\text{Market Price of Preferred}}{\text{Conversion Ratio}} Parity Price of Common = Conversion Ratio Market Price of Preferred
Conversion Premium: The percentage by which the market price of the convertible preferred exceeds its parity price:
Conversion Premium (%) = Market Price of Preferred − Parity Price Parity Price × 100 % \text{Conversion Premium (\%)} = \frac{\text{Market Price of Preferred} - \text{Parity Price}}{\text{Parity Price}} \times 100\% Conversion Premium (%) = Parity Price Market Price of Preferred − Parity Price × 100%
Worked Parity Example: An investor owns a $25.00 par value convertible preferred share with a conversion price of $10.00. The conversion ratio is 25.00 / 10.00 = 2.5 25.00 / 10.00 = 2.5 25.00/10.00 = 2.5 common shares. If the underlying common stock is trading at $14.00, the parity price of the preferred share is $35.00 ($14.00 × 2.5). If the preferred share trades in the market at $36.00, it carries a conversion premium of [ ( 36.00 − 35.00 ) / 35.00 ] × 100 % = 2.86 % [(36.00 - 35.00) / 35.00] \times 100\% = 2.86\% [( 36.00 − 35.00 ) /35.00 ] × 100% = 2.86% .
Convertible preferred shares provide an asymmetric risk-return profile: they establish a yield floor backed by the preferred dividend when common stock prices fall, while allowing unlimited equity upside participation when the common stock rallies.
3. Callable (Redeemable) Preferred Shares
A callable preferred share grants the issuing corporation the right to redeem the shares from investors at a specified call price after a designated future date.
The call price is normally set at par value plus a small call premium (e.g., $26.00 for a $25.00 par share), which typically declines toward par over subsequent years.
Issuer Motivation: If market interest rates drop, the issuer can call the high-dividend preferred shares and refinance at lower financing costs.
Investor Risk: Call provisions expose investors to reinvestment risk (having capital returned when yields are unattractive) and impose an artificial ceiling on capital appreciation above the call price.
4. Retractible Preferred Shares
A retractible preferred share grants the shareholder the contractual right to force the issuing corporation to redeem the shares for cash at par value on a predetermined retraction date.
Investor Motivation: If market interest rates rise, standard perpetual preferred shares fall to deep discounts. A retractable preferred provides an effective "put option" that anchors the market price near par value ($25.00) as the retraction date approaches.
Because this feature provides valuable downside capital protection to the investor, retractable preferreds are issued with lower initial dividend yields than non-retractable preferreds.
5. Floating-Rate (Variable-Rate) Preferred Shares
Floating-rate preferred shares pay a dividend that adjusts periodically (e.g., monthly or quarterly) in lockstep with prevailing short-term benchmark interest rates, such as the Canadian prime rate or the 3-month Government of Canada treasury bill yield.
Because the dividend yield adjusts dynamically with market rates, the market price of floating-rate preferred shares experiences minimal interest rate risk, typically trading close to its $25.00 par value.
6. Fixed-Reset (Rate-Reset) Preferred Shares
Fixed-reset (rate-reset) preferred shares represent a cornerstone innovation of the Canadian capital marketplace. Developed extensively after 2008 by Canadian chartered banks, lifecos, and utilities, they dominate the Canadian preferred share landscape.
Structural Mechanics of Canadian Rate-Resets
Initial Fixed Term: The shares pay a fixed dividend yield for an initial period, almost universally 5 years from issuance.
The 5-Year Reset Anniversary: On the specified reset date, and every five years thereafter, the annual dividend resets to a new fixed rate for the subsequent 5-year period. The new rate is determined by adding a predetermined contractual spread (the fixed reset spread ) to the prevailing 5-Year Government of Canada (GoC) bond yield :
New Reset Rate = 5-Year GoC Bond Yield + Fixed Reset Spread \text{New Reset Rate} = \text{5-Year GoC Bond Yield} + \text{Fixed Reset Spread} New Reset Rate = 5-Year GoC Bond Yield + Fixed Reset Spread
The Investor Conversion Option: At each 5-year reset milestone, the shareholder has the contractual option to choose between:
Retaining the fixed-rate reset preferred at the newly determined 5-year fixed coupon, OR
Converting their shares on a 1-for-1 basis into a floating-rate preferred share of the same series, which pays a floating quarterly dividend based on the 3-month Canadian T-bill rate plus the same reset spread.
The Issuer Call Option: Concurrently, the issuing corporation retains the contractual right to redeem (call) the shares at par ($25.00) on the reset date, providing the issuer with balance sheet flexibility.
Rate-Reset Market Realities and Risks
While designed to protect investors against rising interest rates, rate-reset preferreds introduced distinct market dynamics into Canada:
When the 5-Year GoC bond yield plummets (as occurred during prolonged zero-interest-rate environments), the reset dividend rate drops significantly upon reset. Existing rate-resets suffered steep capital declines, frequently trading at deep discounts (e.g., $14.00 to $18.00 per $25.00 par share).
When the Bank of Canada tightens monetary policy and 5-Year GoC yields escalate, reset dividend rates jump sharply upon reset, driving market prices back up toward their $25.00 par value.