An equity derivative (specifically an equity buy-write structure) that involves a mandatory conversion preferred stock (it resembles both convertible bonds and convertible preferred stocks). This instrument belongs in a general class of bifurcated securities where the return characteristics of the underlying security can, in some manner, be modified or divided among several other derivative securities. This instrument allows the holder to receive a higher yield, whilst accepting a cap on potential capital appreciation. This involves a tradeoff between current income and gain potential as is typically the case with a covered call write. PERCS helps investors play on the corporate capital structure, as they are given the opportunity to receive enhanced yields, together with a capped return, directly from the PERCS issuer. The payoff of a PERCS, at redemption, is given by:

PERCS payoff = Min [price of common stock, PERCS capped price]

That means the PERCS holder will receive one full share of stock at the date of mandatory redemption if the stock price ends up lower than or equal to the capped price. If the stock price is higher than the capped level, the holder receives the equivalent of the capped price paid in common shares at a specific rate (the ratio of the capped price to the stock value).

PERCS was introduced in the early 1990s by Morgan Stanley and Company.