Fixed Interest & Hybrid Securities

There are a wide variety of income securities, convertible notes and reset preference share (RPS) issues available to investors seeking higher fixed interest returns. Each has its own conversion terms, risk rating and interest rate calculation. The floating interest rate for some of these securities provides the investor with protection in the event of interest rate rises. Fully franked yields on some of the hybrid issues equate to very attractive pre-tax returns.

The following is a brief explanation of the various products available;

Hybrid Security

Has both debt and equity characteristics. Being a listed security, they can be easily bought and sold on the ASX.

Reset Securities

A type of hybrid where the income payment rate is reset at a regular date linking it with the current interest rate environment. Reset securities can be switched in to fully paid shares.

Convertible Notes

Debt securities that can be converted into shares. Some of these issues can be particularly attractive as investors get an attractive income yield with the potential for capital growth should the underlying company share price rise.

Collateralised Debt Obligations (CDO’s)

These are a relatively new form of fixed interest investment. Each CDO is essentially a package of corporate bonds and loans. The interest paid is attractive however if too many of the underlying securities default, the investment is put at risk. Not all CDO’s are the same and great care must be taken in understanding the risk profile and default structure. Whilst the bulk of the companies within the CDO may be familiar, it is the lesser known or higher risk businesses that contain the risk to the investor. A CDO can provide a higher return than other defensive assets such as bonds, cash or hybrid securities but with greater risk.

Income Securities

Listed and unsecured, income securities pay quarterly interest and the interest rate is reset quarterly.

Managed High Yield or Income Fund

A managed fund or unit trust, that invests in a mixture of cash and fixed interest investments.