Business Glossary

type of adjustable-rate preferred stock whose dividend is determined every seven weeks in a dutch auction process by corporate bidders. Shares are bought and sold at face values ranging from $100,000 to $500,000 per share. Also known as auction rate preferred stock, Money Market Preferred Stock (Lehman Brothers Inc.), and by such proprietary acronyms as DARTS (Salomon Smith Barney Inc.).

debt-equity hybrids that became popular in the 1980s to meet the strong demand by banks for the raising of capital. One type, equity contract notes, is exchangeable at maturity for common stock having a market value equal to the principal amount of the notes. If the holder of the notes does not choose to receive equities at maturity, the issuer will sell the equity on behalf of the holder. Another type, equity commitment notes, does not require the holder to purchase equity with the notes but rather commits the issuer to redeem the notes with the proceeds of an equity issue at some future date. The Federal Reserve requires issuers to fund a third of the equity in the first four years, another third in the second four years, and the balance by maturity in the third four years. CAPS are still another form of mandatory convertible.

acronym for convertible adjustable preferred stock, whose adjustable interest rate is pegged to Treasury security rates and which can be exchanged, during the period after the announcement of each dividend rate for the next period, for common stock (or, usually, cash) with a market value equal to the par value of the CAPS. CAPS solved a problem inherent with dutch auction preferred stock, which was that the investor could not be certain of the principal value of the preferred.