An Analysis of Percs

This paper examines whether PERCS, Preferred Equity Redemption Cumulative Stocks, have been properly priced with respect to the equivalent packages consisting of longing the common stock and shorting the long-term call option. Test results indicate that PERCS have been overpriced in comparison to the equivalent packages composed of the relevant securities. Further tests on arbitrage restrictions show that transaction costs would prevent arbitrage profits. Investors find PERCS attractive because of the advantages in transaction costs and taxes which PERCS provide