A mandatory convertible (a trust convertible preferred security, trust CPS) that represents a contract to purchase common stock at a specified time (i.e., within 3 years) with the amount of shares required to be purchased equal to the purchase price of the convertible security, and with the number of shares to be received determined by a schedule based on the stock trading price prior to the specified date of purchase (i.e., the 20 days prior to the purchase date).

In other words, a premium equity participating security (PEPS) is a preferred security which pays the security’s specified normal quarterly distribution as well as an additional contract adjustment distribution payment. The preferred security is redeemable 6 months after the purchase contract date.

This security combines the hybrid features of a fixed-income security and a forward purchase contract. This hybrid security provides a fixed income stream in addition to upside participating potential as reflected in the performance of equity component.  The fixed income security typically has a maturity date, a principal amount and an interest payment.

The security holder is obligated to purchase an amount of equity securities of an issuer for a price equal to the stated amount of the security no later than a settlement date specified in the forward purchase contract. Furthermore, the forward purchase contract may also obligate the issuer of the security to make to the purchaser (holder of the forward purchase contract) a specific payment at issuance of the security and, at times, additional payments associated with the forward purchase after issuance.