Notes

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Notes are fixed income debt securities similar to bonds that carry a maturity, or borrowing period, of between one and 10 years. The best known amongst investors are Treasury notes but privately-issued notes by corporations are also popular because, although riskier, they carry higher interest rates than cash equivalents.

Notes such as those issued by the U.S. Treasury, also called T-notes, are issued with maturities of two, five and 10 years and are extremely popular with both retail and institutional investors.[1] Other kinds of notes issued to retail investors by private entities can carry maturities of one year and three years and are usually issued with a face value or par of $1,000 or multiples of $1,000.

Private issues

Notes issued to retail investors by corporations seeking to borrow have also been popular investments although a recent freeze in the credit market caused by the credit crisis has temporarily crimped demand for them. They are issued at par and make regular coupon payments either monthly, semi-annually or annually depending on the interest rate they carry and are also actively traded in secondary markets, meaning the holder can sell them at any time and their value can rise and fall until maturity. However, unlike T-notes, issuers retain the right to cancel or alter the terms of note issues before maturity.[2]

Corporate notes issued by large listed companies with high credit ratings of AAA (Standard & Poor's) or Aaa (Moody's) like GE Capital are considered almost as secure as T-notes. Such notes are fully redeemable anytime and offer holders both bank-type features like check-writing plus higher interest payments than cash equivalents.[3] However, they are not insured by the FDIC, are not invested in diversified funds and are considered unsecured credit, meaning holders have no claim on the issuers in the event of bankruptcy.

Latest news

Some investors have recently been painfully reminded of corporate notes' potential unsecured-credit problem following the recent collapse of U.S. investment Lehman Brothers in the midst of the credit crisis, which has rendered worthless retail notes the bank issued to thousands of investors.[4] Swiss bank UBS now faces dozens of lawsuits in the U.S. over the structured notes' loss of value, which marketed the notes as "low-risk" investments. Structured notes are hybrid debt securities backed by a combination of assets including stocks, bonds and derivatives.

References

  1. Treasury Notes. U.S. Treasury.
  2. Retail Notes Make Bond Investing Easier. Investopedia.
  3. What are corporate notes?. GE Capital.
  4. UBS faces Lehman notes claims. Straits Times.