Can you give me a few examples of debt securities?
Government and corporate bonds, debentures, convertible notes and hybrid debt securities are known as "fixed-interest securities". All except debentures can be traded on the ASX's Interest Rate market.
When you buy a security, the issuing company is basically borrowing from you. In return you will receive a fixed rate of interest over the life of the security.
What are the risks involved?
The risks depend on what debt security you invest in. Many bonds are secured against assets of the issuing company and the investment is returned in full. However, some bonds are unsecured.
These usually offer higher rates of return in line with the old adage "the greater the risk, the bigger the return". Bond holders come before shareholders when it comes to being repaid from a collapsed company.
Convertible notes can be redeemed (paid out by the company) for cash or converted into ordinary shares at a predetermined date or within a certain period.
Hybrid debt securities have both debt and equity characteristics, including those of convertible preference shares that convert into a dollar amount of the ordinary shares of a company at a future date and at a set discount to the ordinary share price at the time. If the holder decides not convert they can either receive the face value back or continue for a new set term.
Other fixed-interest securities, such as debentures, are not traded on the ASX. Debentures are like bonds and are secured against assets (but not land) owned by the issuing company and are riskier than bonds.
Why do most people seem to prefer shares?
Shares have been in vogue during the boom years of the '80s and '90s because their value fluctuates in line with the profitability of the company. The company also pays dividends on the shares. However, as investors in many dotcom companies know, just because the value of a share goes up, it doesn't mean it won't come down.
Bond holders have first claim on the company's assets ahead of shareholders, should the unthinkable happen.
Hence, in time of uncertainty - a lacklustre sharemarket and the possibility of a war in Iraq leading to higher oil prices - many people want the security of fixed-interest investments. Yes, the rate of return is lower, but so is the risk of losing your investment.
Should I forget about shares for now?
Any financial planner worth their salt will tell you that the most important thing to do in the face of uncertainty is to diversify your assets.
This will minimise your risks and protect your returns in the long term.
Is there a minimum investment?
Yes, the minimum investment in the ASX Interest Rate Market is $500 but the usual transaction value recommended by brokers is $5000 or more.
To see what's traded on the ASX, visit www.asx.com.au/markets/IRM-AM2.shtm
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