Home' Army News : February 16th 2012 Contents VOLUME SEVEN
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ADF Financial Services Consumer Council
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Army February 16, 2012
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 household-name
companies and trusted
brands -- but be aware that hybrids
are very different from normal cor-
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 they choose.
Hybrid securities may not suit you
if you need steady returns or security.
Hybrid securities: These are one
way companies can borrow money
from investors, while paying inter-
est. They are offered by well-known
companies and are generally traded
on a secondary market such as the
Australian Stock Exchange (ASX).
The risks: Hybrid securities have
higher risks than most corporate
What are the risks of
investing now and in the
Will the returns offered
for the investment risks?
How does the interest
rate compare with other
investments on a 'risk
adjusted' basis? Can
other less complex, risky
or long-term investments
provide a similar return?
When is the issuer
allowed to exit the deal
or suspend interest pay-
What are the maturity
Will this product help
achieve your personal
goals and objectives,
and does it suit your per-
sonal investment time
frame and risk profile?
Can you exit this invest-
ment if your circum-
bonds. While the conditions, time
frame, risks and interest rates of
each hybrid offers differ, some have
particularly complex features.
Market price volatility: The mar-
ket price of listed hybrid securities
may fall below the price you origi-
nally paid, especially if the company
suspends or defers interest pay-
ments, or performance declines.
Subordinated ranking: Hybrid
securities are generally unsecured,
meaning repayment is not covered
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 of
Early termination: Some hybrid
offers allow the company to terminate
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 investment
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, visit
ASK BEFORE YOU INVEST
Rollercoaster: Investors should be careful when considering hybrid securities -- they can
suffer in a volatile market just like corporate bonds and some place all the power in the hands
of the company.
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