Floating Rate Notes

[gfresh]

I am thinking of putting some money aside for around 12 months, and earn good interest by purchasing some floating rate notes...Either

NABHA (9.048%) or WOWHB (8.44%).

Now as I understand it I can purchase (or sell) these notes on market at any time. While I hold them, I will receive the coupon rate as a payment per quarter (for these ones anyhow).

Are there any risks to be aware of?

Do I have to hold these securities until maturity? I notice there is plenty of depth on the buy and sell side, so does this mean I can just sell into these if needed later on, just like selling standard shares?

Am I correect that the Bond amount moves inverse to yield? If the interest rate goes up, the capital amount of the security goes down? and vice versa?

I can get approx 6.5% through an ING account, but the return on these floating notes obviously looks more attractive.

 

[Bill M]

Hello gfresh, you have tapped on to a very under utilised investment here. I invest in Hybrids and floating rate notes and yes they pay very good interest.

You answered your own question regarding holding them until maturity, you simply don't have to, as you said you can sell them on the market, however you should make sure that it is in fact a listed security.

There are many risks. The first is price movement, lets say the note has a face value if $100. At $100 the coupon may be 8%. You have been watching it for a while and it drops to $98 and you think it's a bargain then you buy. 3 Months later you get your dividend and you think you will sell but the price has now dropped to $93, what do you do? You will make a loss doing this if you sell. Look at CBAPB for example, face value is $200, it has been up to $204 and today it closed at $196.85. If you bought at $200 and you wanted to sell today you will make a loss. It moves up and down like a stock and you can lose if you sell at the wrong time.

Look at SUNHB, this stock on the day before ex div day hit $91, this is a $9 loss off of it's face value. Today SUNHB is $94.99, if you bought this stock for $100 and you need to sell today you will lose 5% of your capital.

If you take on an investment like this you have to understand that if you want to sell on market before maturity and it is under face value then you will lose some of your capital. The only way to win is to hold until maturity. Some floating rate notes are also Perpetual, which means they never mature and if the company does not buy them back and you need to sell then the market price is all you can get, again you can lose capital.

Your comment about bonds is probably correct, that's because it is a fixed interest bond. In other words if you buy this bond for $100 and the coupon is 6% for 10 years then that is all you will get. Lets say 2 years later rates are up to 8% then people would rather buy a bond for 8% then your bond for 6% therefore your bond price goes down. If you are willing to wait until maturity then you don't lose capital but if you need to sell in the mean time the price could be down and again you will lose money.

Some Hybrids and Floating Rate Notes have a clause in their prospectus. It can read like: "The manager can forgo the dividend at anytime and that dividend will therefore be non cumulative". That means if the company has a problem and they can not pay you then you will not get your dividend, I might add this doesn't happen that often but can and does happen.

The good thing about Hybrids and floating rate notes is that the interest is usually based on the 90 day bank bill rate. If the bank bill rate goes up so does your income if it goes down then your income goes down.

There are no shortcuts unfortunately, to put it simply if you are not willing to hold until maturity then you can lose money. If you can hold then it can provide you with some very nice interest income, good luck.

All personal opinion and from personal experiences.

 

[Bill M]

I can get approx 6.5% through an ING account, but the return on these floating notes obviously looks more attractive.

I missed this bit but as I'm not allowed to make recommendations I will only say take a look at Rabo Bank and the RabopPlus account. They are offering 7.15% at call and 8.05% for a fixed term, might be worth a look.

Here is the link, RaboPlus

 

[gfresh]

Bill: Thanks for the rundown - helps when it's put into more human terms. I was a little surprised it hasn't been discussed previously. I did a bit of a search on here but it didn't turn up much.

I might give it a run with a small amount, and after that put a bit more in once I'm comfortable with it all.

Although those 7.15% rates for a savings account look pretty tempting as well.