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Types of Bonds

Questions Investors Should Ask

To fully understand the benefits and risks of fixed-rate capital securities, investors should ask themselves and their account executive the following questions before investing:

  1. Is this investment suitable for my investment objectives, cash-flow requirements, credit quality standards and diversification needs? Does it conform to my investment guidelines (if applicable)?
  2. What are the best- and worst-case yield scenarios?
  3. Can I afford the possibility of no current income, as well as the tax liability associated with the accrual of such income, if the issuer exercises its option to defer payment?
  4. Do I fully understand the issuer’s options to redeem, or “call,” the security prior to maturity or to extend its maturity? What impact might either of these actions have on my yield expectations?
  5. Do I fully understand the tax consequences of this investment?
  6. If I need access to my principal prior to maturity, will there be a ready market for these securities?
 
Fixed-Rate Capital Securities Summary of Alternative Structures
  Partnership preferred Trust preferred/Capital securities Junior subordinated debentures
Issuer: Limited Partnership (LP) or Limited Liability Company (LLC) organized by parent company Grantor Trust established by parent company Parent company
Use of Proceeds: To purchase junior subordinated debentures of parent company. Parent company uses proceeds for general corporate purposes. To purchase junior subordinated debentures of parent company. Parent company uses proceeds for general corporate purposes. General corporate purposes
Names of Security: MIPS, QUIPS Trust Preferred Securities: QUIPS, SKIS; TruPS, TOPrS MIDS; QUICS; QUIDS
Payment Frequency: Monthly/quarterly Quarterly/Semianually* Quarterly (QUICS, QUIDS) monthly (MIDS) or semiannually
Listing: NYSE NYSE or none NYSE or none
Denominations: $25 $25 or $1,000* $25 or $1,000
Tax Reporting Form: K-1 Usually 1099-INT (some 1099-OID) Usually 1099-INT (some 1099-OID)
Maturity: No, but must redeem when underlying debentures are redeemed, generally 20-49 years after issuance. No, but must redeem when underlying debentures are redeemed, generally 20-49 years after issuance. Yes, 20-49 years.
Maturity Extension Feature: Yes, on most but not all deals, though generally not beyond 49 years. Yes, on some retail-targeted deals, though generally not beyond 49 years. No
Interest Deferral Feature: Yes, generally maximum of 5 years. Yes, generally maximum of 5 years. Yes, generally maximum of 5 years.
Special-Event Redemption Language: Yes Yes No
Representative Issuers: MIPS: Texaco, GTE, Peco Energy, American General; QUIPS: Grand Metropolitan, Cadbury, Schweppes, MEPC Ford Motor, RJR Nabisco, US West, Virginia Power, American Reinsurance, ITT Hartford, Farmers Group Insurance, MBNA, Wells Fargo, Bankers Trust, Conseco, Countrywide Credit QUICS: Carolina Power & Light MIDS: Arizona Public Service; QUIDS: TVA, Detroit Edison

* Some of the newer fixed-rate capital securities are marketed primarily to institutional buyers, and have a $1,000 denomination and make distributions semiannually.

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All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.