What are Fixed-Rate Capital Securities?
Fixed-rate capital securities are fixed income securities that have features of both corporate bonds and preferred stock.
How Do Fixed-Rate Capital Securities Work?
Similar to a hybrid security, fixed-rate capital securities have features of both preferred stock and corporate bonds. Fixed-rate capital securities are issued in par values ranging from $25 to $1,000 per share. They attract income investors by offering high yields and fixed payments that may be distributed monthly, quarterly or semi-annually.
Similar to bond maturity terms, fixed-rate capital securities offer predictable investment time frames ranging from 20 to 50 years, or in some cases, in perpetuity.
Like preferred stock, fixed-rate capital securities give issuing companies flexibility and protection by allowing the company to defer making payments to shareholders should it face financial difficulties. The issuing company, however, may only defer the payments if it ceases all other stock dividend payments.
Like bonds, distributions made to shareholders are tax deductible for the issuing company.
Why Do Fixed-Rate Capital Securities Matter?
Fixed-rate capital securities are attractive to investors seeking high yields and consistent, predictable income payments.
However, investors should be aware (as discussed earlier) that issuers facing financial distress have the right to defer payments; thus, investors are not guaranteed income by holding fixed-rate capital securities.