Understanding the risks and benefits of Fixed Income Securities

Debt investors have two options when it comes to fixed-income investments: capital notes and loan notes. Both offer a fixed rate of return but come with different risks and benefits of Fixed Income Securities. To make the best investment decisions, it's important to understand the key differences

Key facts about capital notes and loan notes and what makes them attractive to debt investors

Capital Notes Benefits and Risks:

Benefits of Capital Notes:

  • Hybrid nature: Capital notes have both debt and equity characteristics, offering a fixed rate of return to the investor while also providing exposure to the underlying company’s performance.
  • Potential for higher returns: Capital notes typically have a higher yield compared to traditional debt securities, making them attractive to investors seeking higher returns.
  • Longer maturity: Capital notes often have a longer maturity compared to traditional debt securities, which can provide a stable source of income for a longer period.

Risks of Capital Notes:

  • Higher risk: As the return to the investor is tied to the underlying company’s performance, capital notes are generally considered higher risk compared to loan notes.
  • Unsecured: Capital notes are often unsecured, meaning that the investor’s claim to the company’s assets is subordinate to that of other debt holders in the event of default.
  • Volatility: The value of capital notes can be volatile, as it is tied to the performance of the underlying company.

Loan Notes Benefits and Risks:

Benefits of Loan Notes:

  • Predictable income: Loan notes provide a predictable income stream to the investor, as the return is based on a fixed or floating interest rate.
  • Lower risk: Loan notes are generally considered less risky than equities, as they provide a more predictable return to the investor.
  • Widely available: Loan notes are issued by various entities, including corporations, governments, and agencies, making them widely available to investors.

Risks of Loan Notes:

  • Credit risk: Loan notes carry credit risk or the risk that the issuer will default on their obligation to repay the principal and interest.
  • Interest rate risk: If interest rates rise, the value of existing fixed-rate loan notes may decrease.
  • Market risk: The value of loan notes can also be affected by broader market conditions, such as changes in interest rates or economic growth.

What can cause a capital or a loan note to deviate from face value? Who can bid for new capital note issuance?

A capital note may deviate from face value due to changes in the underlying company’s performance, as well as changes in market conditions and interest rates.

A loan note may deviate from face value due to changes in interest rates, credit risk, and market conditions.

New capital note issuances are typically open to a wide range of investors, including individuals and institutional investors. The specific eligibility criteria for bidding for a new capital note issuance will depend on the issuing company and the terms of the offering.

Do investors pay brokerage when buying or disposing of each note?

Investors may be required to pay brokerage when buying or disposing of capital and loan notes. The specific fees and charges will depend on the broker and the market in which the security is traded.

How we can help

A range of financial institutions, including banks, independent wealth management firms, and boutique investment firms, serves Australia’s debt securities or the fixed-income securities market. These institutions, including B. Moses Asset Management and our Private Wealth arm, offer a wide range of investment products and services tailored to the specific needs of HNW and sophisticated investors.

Our team of experienced Private Wealth Advisors will work closely with you to create a customised investment strategy that aligns with your specific financial goals. We will provide regular updates on your investments and transparent reporting to ensure that you are always informed about your portfolio’s performance. With our expertise and commitment to providing the best possible returns for our clients, you can expect us to be accountable to you and trust us to be objective throughout your advice and investment journey with B. Moses.