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Range of interest securities grows

INVESTORS in interest rate securities have an ever-expanding selection to choose from.

The securities being offered by AMP (see main article) are known as ‘resetting preference shares’ and are a relatively recent innovation.

Other types of interest rate securities include ‘capital notes’, ‘convertible notes and ‘floating rate notes’.

These ASX-listed securities are additional to the numerous unlisted interest-bearing investments, such as debentures and treasury bonds, which have long been available to retail investors.

Capital notes are very similar to debentures and bonds. They pay a fixed rate of return and have a known maturity date, at which time the holder is paid the face value.

As such, they provide the investor with a known investment outcome from the time of purchase until maturity.

Floating rate notes have a variable interest rate. They are typically issued at a designated margin over the 90-day bank bill rate. Therefore, as market rates fluctuate up and down, so does the return on these securities.

The size of the margin is usually tied to the credit quality of the issuer. For instance, a company with a ‘BBB’ rating will pay a higher margin than a ‘AA’ rated company.

Convertible notes pay a fixed rate of return for an initial period. Holders then have the right to redeem the face value of the notes or convert into the ordinary shares of the issuer.

Capital notes, floating rate notes and convertible notes are all characterised as debt instruments.

Therefore, they carry a lower risk than equity instruments such as ‘converting preference shares’ (CPS) and RPS.

These securities are known as ‘hybrids’ because they are a form of equity and have some of the characteristics of fixed interest investments.

They have a lower risk than holding ordinary shares and they have a known dividend stream from the outset.

CPS securities are compulsorily converted to ordinary shares on the conversion date whereas RPS may roll into a new CPS (with terms set by the issuer) or convert into ordinary shares.

The dividends on most hybrids are partly or fully franked, just like dividends on ordinary shares.

This boosts the after-tax return for investors, though this feature is not universal.

For instance, AMP’s RPS securities do not pay franked dividends.

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