Home' Navy News : February 16th 2012 Contents VOLUME SEVEN
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February 16, 2012
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Investors need to understand the risks involved with hybrid securities and notes,
says Australian Securities and Investment Commission chairman Greg Medcraft.
YOU may be attracted to hybrid
securities and notes offered by
and trusted brands -- but be
aware that hybrids are very different
from normal corporate bonds.
Make sure you understand the con-
ditions and risks before committing
Some hybrid securities ask you to
take on 'equity-like' risks but only
give you at best 'bond-like' returns.
Some also have terms and condi-
tions that allow the issuer to exit the
deal or suspend interest payments when
Hybrid securities may not suit you
if you need steady returns or capital
What are hybrid securities?:
Hybrid securities are one way
companies that borrow money from
investors, while paying interest.
They are offered by well-known
companies and are generally traded
on a secondary market such as the
Australian Stock Exchange (ASX).
The risks: Hybrids have higher
risks than most types of corporate
bonds. While the conditions, time
frame, risks and interest rates of each
hybrid offers differ, some have par-
ticularly complex features and risks.
Market price volatility: Like
company shares, the market price
of listed hybrid securities may fall
below the price you originally paid,
especially if the company suspends
or defers interest payments, or if
Subordinated ranking: Hybrid
securities are generally unsecured,
meaning repayment is not secured
by a security over any asset. If the
company you bought them from
becomes insolvent, you will gener-
ally rank behind other bondholders.
Deferral of interest payments:
Some offers allow the company to
suspend interest payments for a
number of years. While the inter-
est owing may be cumulative, this
could leave you temporarily out
Questions to ask
before you invest
You can get these from your
financial adviser or by thor-
oughly reading the prospectus.
What are the risks of investing
now and in the future?
Will the returns offered
adequately compensate for the
How does the interest rate
compare with other invest-
ments on a 'risk adjusted'
basis? Can other less com-
plex, risky or long-term
investments provide a similar
When is the issuer allowed to
exit the deal or suspend inter-
What are the maturity dates?
Will this product help achieve
your personal goals and
objectives, and does it suit
your personal investment time
frame and risk profile?
Can you exit this investment if
your circumstances change?
Early termination: Some hybrid
offers allow the company to termi-
nate or buy back the investment early,
but don't give you that same right.
Extremely long timeframes:
Some hybrids have terms lasting
decades. With a 60-year term, a
40-year-old investing today needs
to live to 100 to see their invest-
ment mature. You may be able to
sell the security on a secondary
market such as the ASX, but only if
there is a demand for that security.
For more information about investing,
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