Callable stock is an ownership interest in a corporation that can be “called-in” by the corporation at a specified price.

For example, a corporation might issue 9% $100 Preferred Stock. The stock agreement (indenture) states that the stock is callable by the corporation after three years at $109 per share plus any accrued interest. If in the fourth year, market interest rates decline to say 7%, the corporation can call-in the preferred stock by paying the call price of $109 plus any accrued interest.

The callable feature allows the corporation to get out of the preferred stock agreement requiring it to pay 9% interest. In turn, the stockholders will be deprived of receiving the 9% interest in a 7% market. The call price has the effect of limiting how high the market value of preferred stock will rise.

Learn more about Stockholders’ Equity.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the creator of the AccountingCoach Pro which has been praised for its ability to simplify accounting in a way that anybody can understand.

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