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+0.,t,r 32: Structured Products 619 
+t'Ussed in the remainder of this chapter, resembles the covered write of a call 
+option. These often have names involving the term preferreds. Some are called 
+Trust Preferreds; another popular term for them is Preferred Equity Redemption 
+Cumulative Stock (PERCS). We will use the term PERCS in the following exam­
+ples, but the reader should understand that it is being used in a generic sense - that 
+any of the similar types of products could be substituted wherever the term PERCS 
+is used. 
+A PERCS is a structured product, issued with a maturity date and tied to an 
+individual stock. At the time of issuance, the PERCS and the common stock are usu­
+ally about the same price. The PERCS pays a higher dividend than the common 
+stock, which may pay no dividend at all. If the underlying common should decline in 
+price, the PERCS should decline by a lesser amount because the higher dividend 
+payout will provide a yield floor, as any preferred stock does. 
+There is a limited life span with PERCS that is spelled out in the prospectus at 
+the time it is issued. Typically, that life span is about three years. At the end of that 
+time, the PERCS becomes ordinary common stock. 
+A PERC S may be called at any time by the issuing corporation if the company's 
+common stock exceeds a predetermined call price. In other words, this PERCS stock 
+is callable. The call price is normally higher than the price at which the common is 
+trading when the PERCS is issued. 
+What one has then, if he owns a PERCS, is a position that will eventually 
+become common stock unless it is called away. In order to compensate him for the 
+fact that it might he called away, the owner receives a higher dividend. What if one 
+substitutes the word "premium" for "higher dividend"? Then the last statement 
+reads: In order to compensate him for the fact that it might be called away, the owner 
+receives a premium. This is exactly the definition of a covered call option write. 
+Moreover, it is an out-of-the-money covered write of a long-term call option, since 
+the call price of the PERCS is akin to a striking price and is higher than the initial 
+stock price. 
+Example: XYZ is selling at $35 per share. XYZ common stock pays $1 a year in div­
+idends. The company decides to issue a PERCS. 
+The PERCS will have a three~ life and will be callable at $39. Moreover, the 
+PERCS will pay an annual dividend of $2.50. 
+The PERCS annual dividend rate is 7% as compared to 2.8% for the common 
+stock. 
+If XYZ were to rise to 39 in exactly three years, the PERCS would be called. 
+The total return that the PERCS holder would have made over that time would be: