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Bank Savings Equity Instruments Bonds Treasury Securities Government Agencies Derivatives Funds Annuities


 - Type of Yields

 - Bond Rating Agencies

 - The Yield Curve

 - Laddering

Types of Bonds
 - Corporate Bonds

 - Municipal Bonds

 - Asset Backed Securities

 - High-Yielding Securities –
   Junk Bonds

 - Enhanced Trust- Preferreds

 - Zero-Coupon Bonds

 - STRIPS Bonds

 - Internotes

 - International Bonds

 - Brady Bonds




Enhanced Trust Preferreds

These are new financial debt/equity hybrid instruments mainly sold to institutional investors. The accounting and tax treatment has not yet been finalized and ruled upon by the regulators. These fund raising instruments have the following attributes:

  • Yields are competitive, but on the high side. Rates can be fixed or variable.
  • The dividend/interest payment is tax deductible to the issuing corporation; usually dividend payments are not tax deductible. The tax deductibility makes these instruments a very attractive fund raising vehicle.
  • Maturities are long-term, 50 to 60 years plus.
  • Repayments are subordinate to the senior lenders and other shorter term creditors, making them equity-like instruments. The long-term payback of this debt effectively acts as a yield enhancement for the shorter term creditors.  
  • Flexible interest payments and default triggers for the insurers. Interest payments are directly tied to credit ratings. If credit ratings drop, in accordance with preset thresholds, interest payments will be halted, but it does not trigger defaults.

These instruments are very attractive to companies because the equity/debt payments are tax deductible, reducing a company’s cost of capital. They also lower leverage ratios and optimize earnings per share.

Because this product is in its developmental stage, there are many variations being sold. For example, many issuances contain call provisions.

Some financial institutions are prematurely classifying these instruments as debt, thereby using a lower risk weighting then equity securities. The proper classification of these hybrid securities has not yet been determined.  

Investors, however, need to weigh whether the little extra yield is worth all the extra risk!


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