Fixed-Rate Capital Securities
What it is:
How it works/Example:
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.
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.
Why it matters:
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.