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Fixed-to-Floating Preferred Stock Explained
The short answer
A fixed-to-floating preferred pays a fixed coupon for an initial period — commonly five or ten years — and then switches to a floating rate that resets periodically for the rest of its life.
The consequence matters: after the reset, the coupon printed on the security is no longer what you actually earn.
How the floating rate is set
The prospectus states a formula, almost always:
benchmark rate + a fixed spread
Older issues referenced LIBOR. Since LIBOR was retired, most have transitioned to SOFR (with a small spread adjustment baked in by law). So an issue might pay "three-month SOFR + 3.85%," recalculated every quarter.
The spread never changes. The benchmark does. That is the whole mechanism.
Why issuers use this structure
Two reasons, mostly:
- Regulatory capital. Banks need preferreds that behave like permanent capital. A structure with no maturity but a periodic reset satisfies that while giving the market a predictable early exit point.
- Flexibility. The issuer sets the first call date on the reset date. At that moment it chooses: redeem at $25, or start paying the floating rate.
The reset date is a decision point — for the issuer
On the reset date, the company compares two costs:
- Keep the shares outstanding and pay benchmark + spread.
- Call them at $25 and reissue at whatever the market demands today.
If rates have fallen, refinancing is cheaper, so the issue is usually called. If rates have risen, the old spread may now look cheap to the issuer, so it lets it float and you keep collecting.
Notice the asymmetry: you tend to keep the security exactly when its floating rate is less attractive relative to new issues, and lose it when it is most attractive.
Why the "coupon" figure can mislead
Screeners often display the original fixed coupon long after the security has begun floating. Two problems follow:
- The displayed coupon overstates or understates the real income.
- Any yield computed from coupon × par will be wrong.
On this site we store the initial coupon, record the float formula separately, and compute the yield of a floating issue from its actual paid dividend — never from a stale coupon. That is why a floating issue's yield can differ from its printed coupon.
What to check before buying
- Has it already reset? If yes, the fixed coupon is history.
- What is the spread? A wide spread over the benchmark is real, durable income.
- What is the benchmark? SOFR-linked issues move with short-term rates.
- Is it past its call date? Then it can be redeemed at $25 at any time.
How this changes your rate exposure
A plain fixed-rate perpetual preferred is very sensitive to long-term interest rates — rates up, price down. A floating preferred is different: because its coupon rises with rates, its price is far less rate-sensitive once floating. That can be a feature in a rising-rate environment and a drawback in a falling one, when your income shrinks.
Key takeaways
- Fixed coupon first, then benchmark + fixed spread, resetting periodically.
- The reset date is usually the first call date — the issuer's choice, not yours.
- After reset, the stated coupon no longer describes your income.
- Floating issues are less interest-rate sensitive, but your income becomes variable.
Browse issues with reset terms in the floating-rate preferreds list.
Frequently asked questions
This guide is for education only. Nothing here is investment, tax, or legal advice, or a recommendation to buy or sell any security. Figures on this site are drawn from SEC filings and live market data; always verify terms in the issuer's own prospectus before investing.