Preferred stock is a fixed income security instrument, meaning that the dividend is set at issuance. When you purchase a share of preferred stock, you’ll be purchasing a financial instrument with a possibly limited shelf life. Each share issuance comes with a redemption date on which the stock can be liquidated for a specified price. To find out the actual value of the stock over the life of the instrument will require that you perform a yield-to-maturity calculation. In order to do so, you’ll need to have some basic information that can be found on your stock certificate.
Find the coupon rate, the market price, the liquidation value and the years to maturity of the stock. The coupon rate is the unchanging dividend rate guaranteed when dividends are paid on the share of preferred stock while the liquidation preference is the price a holder of preferred stock would receive in the case of liquidation of the security, with the years to maturity being the number of years remaining before the redemption date.
Calculate the yearly dividend of the stock, which is the coupon rate applied to the liquidation preference of the stock. So, with a stock that has a liquidation value of $1,000 with a coupon rate of 5%, the yearly dividend will be $50.
Calculate the total discount of the stock. The total discount is the difference between the liquidation value of the stock and the market price of the stock. The $1,000 liquidation value stock that’s priced at market at $850 will have a total discount of $150.
Calculate the annual discount of the stock by dividing the total discount by the years to maturity. If the stock with the $150 total discount had 15 years to maturity, then the annual discount of the stock would be $10.
Calculate the average price of the stock, which is the difference between the liquidation value and the market price. A stock with a liquidation value of $1,000 and a price of $850 will have an average price of $925.
Use the data already calculated for a stock with a liquidation value of $1,000, a market price of $850, a coupon rate of 5% and 15 years left to maturity to determine its yield to maturity. Take the annual discount of $10 and add it to the yearly dividend of $50. Divide this $60 by the average price of $925 and you have a yield to maturity of 6.49 percent.
Most financial calculators have a yield to date function that only requires you to input the liquidation value, the coupon rate, market value and years to maturity.