OVERVIEW
Fixed Rate Callable Agency Securities are fixed income notes purchased at FISN, a brokerage firm. FISN searches nationwide for the Callable Agency notes with the highest return and offers these securities for investment. Agency securities have a high credit quality and are liquid. Callable investments offer higher rates than non-callable notes but the issuer has the right to return the funds early. Agency issuers and brokerage firms team-up to distribute these investments across the nation. FISN has access to the widest inventory from major Wall Street firms. Investors select agency securities that meet their needs for safety, yield and return of principal. The security is held in a brokerage account.
PROCESS
Investors start by selecting suitable Fixed Rate Callable Agency Securities for investment and then open a standard brokerage account at FISN in their name. A brokerage account can hold many agency securities from any agency issuer, for instance, to construct a laddered portfolio. The investor wires funds or sends a check to fund this new account. FISN sends new account paperwork and purchase confirmations to the investor. The brokerage forms are completed and the transaction confirmation is verified. Only one account needs to be opened for each ownership category. Paperwork is returned to FISN along with the required identification.
CREDIT QUALITY Agencies or U.S. Government sponsored enterprises (GSE) carry the highest credit rating, if their bonds are rated. A credit rating is the measurement of the financial strength of a bond issuer. This measurement helps an investor to understand an issuer’s ability to make timely interest payments and repay the investment principal upon maturity. Credit quality ratings are provided by nationally recognized rating agencies. The notes are not bank deposits and are not FDIC insured. Principal is protected at maturity by the issuer.
The following is an explanation of the top credit ratings. The rating for each individual investment should be evaluated based the rating criteria. Credit ratings fluctuate with business conditions. Upgrades and downgrades in credit ratings change the risk profile of issuers and possibility the market prices of their securities.
Long Term Credit Ratings
Investment Grade AAA ratings denote the highest rating assigned. This rating is assigned to the "best" credit risk relative to all other issuers or issues.
AA ratings denote a very strong credit risk relative to other issuers or issues. The credit risk inherent in these financial commitments differs only slightly from the highest rated issuers or issues.
A ratings denote a strong credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions may affect the capacity for timely repayment of these financial commitments to a greater degree than for financial commitments denoted by a higher rated category.
BBB ratings denote an adequate credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment of these financial commitments than for financial commitments denoted by a higher rated category.
Below Investment Grade BB ratings denote a fairly weak credit risk relative to other issuers or issues. The payment of the financial commitments is uncertain to some degree and capacity for timely repayment remains more vulnerable to adverse economic change over time.
B ratings denote a significantly weak credit risk relative to other issuers or issues in the country. Financial commitments are currently being met but a limited margin of safety remains and capacity for continued timely payments is contingent upon a sustained, favorable business and economic environment.
See Corporate Bond Ratings chart for a simple description and comparison of credit quality ratings issued by S&P, Moody’s and Fitch.
CALLABLE FEATURES
U.S. Government sponsored enterprises (GSE), referred to as agencies, are alternative investment opportunities to traditional CDs. The issuers are known as “government agencies” but are privately owned corporations created by Congress for a special public purpose. They are not FDIC insured, like banks. Callable agencies have an initial non-callable term and a callable term. They pay interest at a fixed rate over the life of the investment. The interest is paid on a semi-annual or monthly basis into the brokerage account where it can continue to earn interest in a money market fund account. At the end of the non-callable period, the security may be called for the full amount of the investment. When called, the issuer returns the amount to the brokerage account with full interest to date. If not called, it remains callable, usually every 6 months. Only the issuer can make the call decision, not the account holder or the broker. The security will continue to pay interest for the full, possible term if it is never called. Some GSE issuers pay interest that is tax free at the state level. Key information is the name of the issuer, the state tax status, the first call date, subsequent call dates and the final stated maturity at the end of the possible term. Investments offered by FISN are sold subject to availability and price. There is no early withdrawal permitted but the investment can be sold in the secondary market. Securities sold prior to maturity are subject to market conditions and could result in a loss.
Interest can be disbursed immediately or periodically via checks or electronic funds transmission straight to your local bank. Available cash also can be withdrawn from the account via checks, automatic teller machines or debit cards. There may be fees for accounts with ATM or debit cards.
ID REQUIREMENTS
Brokerage accounts are opened at FISN’s brokerage division, First Internet Securities Network. Securities in FISN accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company. FISN is required under U.S. government rules to verify ownership of all accounts. Individuals are required to provide a copy of a government-issued photo identification. Business accounts, trusts and other non-individual accounts have special documentation requirements.
FEES
There are no investment fees or commissions paid by the investor. The issuers of the securities pay brokers to distribute their newly issued securities. New issue securities are sold at par or a price of 100.0 to the investor. Par is the face amount of the investment on which interest is earned. Most investments require a minimum purchase amount. Secondary market securities are sold net to the investor without any commissions, and are usually offered at a market price indicating a discount or premium to par.
The above disclosure is typical for this type of issue. Actual disclosures are published for each new issue in most cases. Look for the related disclosure for each deal on the FISN web site or ask your FISN Registered Representative to send it to you. Current disclosures are made available to purchasers for new issues either by mail or online after the trade date or settlement date. Disclosures for secondary issues were publish at the time of the original settlement and may not be available or up-to-date.
UNIQUE RISKS FOR FIXED RATE CALLABLE AGENCY SECURITIES
These fixed rate agency securities present unique risks related to the call features. Callable investments pay a fixed interest rate until called. The issuer can choose to make the call decision at any call date after the initial non-call period for any reason. Investors should be aware of the timing of each call date and the other terms of the security. The risk is that the interest rate payable by the security may be above prevailing market rates. If the rate is above the market and the investment is callable, the underlying security becomes subject to Call Risk since the issuer is motivated to replace the issue with less costly funds. Reinvestment Risk arises when investments are called, causing investors to relinquish a high rate and replace it with a lower, current market rate.
Some agency securities from the Federal Home Loan Bank are not transferable in units less than $100,000 to another broker dealer outside the complex operated by National Financial Services (NFS). FISN can sell these securities in smaller units to its customers. These securities can be easily held in FISN accounts but will need to be sold within the NFS complex of broker dealers if the customer is moving their holdings to another broker dealer outside this complex of hundreds of firms. FISN can facilitate such a sale.
MARKET RISK
All investments held in a securities account are subject to market risk. Market risk is always present but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. This risk arises from the valuation that potential buyers in the market put on an investment that could be offered for sale. The potential risk is that the value may fall and transaction cost may be incurred if the item is put up for sale. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. It is possible that the value could rise as well and then it would be a market value gain. Market risk is an overall risk caused many factors such as interest rate movements, transaction cost and availability of purchasers.
INTEREST RATE RISK
All investments that pay interest or dividends are subject to interest rate risk. CD Alternative Investments sold by FISN are included since their primary purpose is to produce income in the form of interest. Interest rate risk is present if interest rates are moving up from their original level but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. The rule is simple: if rates rise, the “market” value will fall. All purchasers in the secondary market demand the yield on previously issued investments be increased to current levels before they buy them. Yields are increased by reducing the price. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Of course, the value may rise if interest rates fall and then it would be a market value gain if sold.
SECONDARY MARKET AVAILABILITY RISK
All investments are subject to the availability of a secondary market. Income producing investments including CD Alternative Investments sold by FISN are included since they don’t trade such as stocks do on an established “stock market”. The risk is the availability of such an organized and active place to sell your investment. This risk is present if you plan to sell your investment but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. FISN, though not obligated to do so, may maintain a secondary market in these investments after any initial distribution. Simply stated - buyers are needed to sell something. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager.
CALL RISK
Callable investments, including callable CD Alternative Investments sold by FISN, are subject to call risk. Investors should clearly understand all call provisions. This risk is present even if you plan to hold your investments until maturity. The issuer can “call” or redeem a security on certain call dates prior to maturity. The issuer calls the entire issue regardless of the holder. When called, the issuer returns the full amount with interest up to the call date. Only the issuer can exercise a call, not the account holder or the broker. Issuers usually call a security when rates have fallen and they can replace the funds at a lower rate. The risk is that, even though you get back your full investment, when you go to reinvest your funds, it will earn a lower rate. Calls cannot be predicted even though issuers consider only their own needs and costs. Call risk is difficult to evaluate for monthly statements. It is better estimated by requesting your FISN Investment Manager to seek out potential buyers for the actual investment position.
RE-INVESTMENT RISK
All fixed income investments are subject to re-investment risk. This risk is related to what you do when an investment ends, regardless of the reason. If you plan to continue investing, you have to re-enter the marketplace to find a new, replacement investment. One side of this “risk” is that rates may be lower and/or less product is available. The other side of this “risk” is that rates may be higher and/or more product is available. Strategies to lessen this risk are to time investment maturities close to when you might need the money or to go long when rates appear high and to go short term when rates appear low. Some investors do both by laddering the maturities between long and short terms. Long term maturities capture higher returns paid for longer investments. Shorter maturities keep the remainder of your funds regularly available so rate swings are not missed.
PRINCIPAL RISK
All investments are subject to principal risk. This risk is connected to the issuer. If the financial outlook of an issuer declines, the issuer’s credit rating could be downgraded or the issuer could actually default on its debt. With most debt, if the issuer is less creditworthy, the debt will fall in value. And, if the issuer cannot repay the debt at all, the investment may be near worthless. The principal value will diminish in either case.
OVERVIEW
Fixed income securities are less liquid than trading investments such as stocks. Fixed income securities are designed to be held long term, or to maturity, rather than being bought and sold, over and over again. Investors can reclaim their funds by exiting a security through a variety of methods. Although there are no early withdrawal rights, nearly every investment can be sold in an active market and some have a payment at death feature.
EARLY WITHDRAWAL
Fixed income securities held in a brokerage account do not have early withdrawal rights for any reason, like some certificates of deposit.
INVESTMENT SALE
Securities purchased through FISN can be sold in the secondary market for fixed income investments. This market is an “over the counter” market which is actually conducted over the telephone between brokerage firms. There is no mechanism such as the New York Stock Exchange where orders can be entered and a sale is guaranteed. The availability of this secondary market cannot be guaranteed. And, there may not be buyers willing to pay an acceptable price if a security is put up for sale. Also impacting the price is that any investment posted for sale will compete with other fixed income investments being offered at the same time. To start the sale process, the investor has to offer their investment for sale to their broker. The broker will consider whether the brokerage firm wants to hold the security in its own inventory for resale at a later time or to sell it to another brokerage firm on the “street”. The broker will offer a net price to the investor for each security. The FISN broker and other “middle men” will build into their prices a trading incentive to cover their cost and profit objectives. The investor can accept the price or continue to hold the security. There is no assurance how high the “bid” price will be or that this price will be close to estimated prices shown online or printed on recent statements. Prices are simply reflections of the market and business objectives of participating firms.
TRANSFERABILITY
Most securities can be transferred amongst brokerage firms. The receiving firm generally requests the delivering firm to transfer cash and securities between accounts registered in the same ownership capacity. All debits and fees need to be paid prior to a transfer. Every firm has a process including minimums, fees and forms. It is not typical for certificates to be issued and sent to owners of record. Holding certificates outside the brokerage community reduces liquidity, prolongs an ownership transfer and lengthens the time for any sale.
Some agency securities from the Federal Home Loan Bank are not transferable in units less than $100,000 to another broker dealer outside the complex operated by National Financial Services (NFS). FISN can sell these securities in smaller units to its customers. These securities can be easily held in FISN accounts but will need to be sold within the NFS complex of broker dealers if the customer is moving their holdings to another broker dealer outside this complex of hundreds of firms. FISN can facilitate such a sale.
PAYABLE ON DEATH
Some securities have a feature that permits the investment to be paid off following the death of an owner. The standard privileges for refunding apply if the investment is owned by a single person or by a joint account of individuals. Other ownership forms used by individuals may require investigation to determine whether they fit the circumstances necessary for payment on death. Each issuer has its own program of rules and limits since there are no government rules or standards. If applicable, the issuer usually requires a death certificate and a standard form indicating the authority of a living individual to request the payment following death for the deceased person. FISN can assist survivors or estate officials in this process. The return of funds is not immediate and can take several weeks once all the paper work is submitted. The funds are simply returned to the brokerage account. The full amount is returned with interest up to the date of termination.
OVERVIEW
Fixed Rate Callable Corporate Securities are fixed income notes purchased at FISN, a brokerage firm. FISN searches nationwide for the Callable Corporate notes with the highest return and offers these securities for investment. Corporate securities pay a higher return than agencies. Corporate securities offered by FISN carry an investment grade credit quality and are liquid. Callable investments offer higher rates than non-callable notes but the issuer has the right to return the funds early. Corporate issuers and brokerage firms team-up to distribute these investments across the nation. FISN has access to the widest inventory from major Wall Street firms. Investors select corporate securities that meet their needs for safety, yield and return of principal. The security is held in a brokerage account.
PROCESS
Investors start by selecting suitable Fixed Rate Callable Corporate Securities for investment and then open a standard brokerage account at FISN in their name. A brokerage account can hold many corporate securities from any corporate issuer, for instance, to construct a laddered portfolio. The investor wires funds or sends a check to fund this new account. FISN sends new account paperwork and purchase confirmations to the investor. The brokerage forms are completed and the transaction confirmation is verified. Only one account needs to be opened for each ownership category. Paperwork is returned to FISN along with the required identification.
CREDIT QUALITY Issuers of Fixed Rate Callable Corporate Securities offered by FISN carry an Investment Grade. A credit rating is the measurement of the financial strength of a bond issuer. This measurement helps an investor to understand an issuer’s ability to make timely interest payments and repay the investment principal upon maturity. Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies. The notes are not bank deposits and are not FDIC insured. Principal is protected at maturity by the issuer.
The following is an explanation of the top credit ratings. The rating for each individual investment should be evaluated based the rating criteria. Credit ratings fluctuate with business conditions. Upgrades and downgrades in credit ratings change the risk profile of issuers and possibility the market prices of their securities.
Long Term Credit Ratings
Investment Grade AAA ratings denote the highest rating assigned. This rating is assigned to the "best" credit risk relative to all other issuers or issues.
AA ratings denote a very strong credit risk relative to other issuers or issues. The credit risk inherent in these financial commitments differs only slightly from the highest rated issuers or issues.
A ratings denote a strong credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions may affect the capacity for timely repayment of these financial commitments to a greater degree than for financial commitments denoted by a higher rated category.
BBB ratings denote an adequate credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment of these financial commitments than for financial commitments denoted by a higher rated category.
Below Investment Grade BB ratings denote a fairly weak credit risk relative to other issuers or issues. The payment of the financial commitments is uncertain to some degree and capacity for timely repayment remains more vulnerable to adverse economic change over time.
B ratings denote a significantly weak credit risk relative to other issuers or issues in the country. Financial commitments are currently being met but a limited margin of safety remains and capacity for continued timely payments is contingent upon a sustained, favorable business and economic environment.
See Corporate Bond Ratings chart for a simple description and comparison of credit quality ratings issued by S&P, Moody’s and Fitch.
CALLABLE FEATURES
Callable corporate securities are unsecured and unsubordinated obligations of the corporate issuer. These notes offer alternative investment opportunities to traditional CDs with yields higher than government agency securities. The issuers are major U.S. corporations and are not FDIC insured, like banks. Callable notes have an initial non-callable term and a callable term. They pay interest at a fixed rate over the life of the investment. The interest is paid on a semi-annual or monthly basis into the brokerage account where it can continue to earn interest in a money market fund account. At the end of the non-callable period, the security may be called for the full amount of the investment. When called, the issuer returns the amount to the brokerage account with full interest to date. If not called, it remains callable, usually every 6 months. Only the issuer can make the call decision, not the account holder or the broker. The security will continue to pay interest for the full, possible term if it is never called. Key information is the name of the issuer, the issuer credit quality, the first call date, subsequent call dates and the final stated maturity at the end of the possible term. A new selection of terms and rates from many issuers is offered each week by FISN, sold subject to availability and price. There is no early withdrawal permitted but the investment can be sold in the secondary market. Securities sold prior to maturity are subject to market conditions and could result in a loss.
Interest can be disbursed immediately or periodically via checks or electronic funds transmission straight to your local bank. Available cash also can be withdrawn from the account via checks, automatic teller machines or debit cards. There may be fees for accounts with ATM or debit cards.
ID REQUIREMENTS
Brokerage accounts are opened at FISN’s brokerage division, First Internet Securities Network. Securities in FISN accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company. FISN is required under U.S. government rules to verify ownership of all accounts. Individuals are required to provide a copy of a government-issued photo identification. Business accounts, trusts and other non-individual accounts have special documentation requirements.
FEES
There are no investment fees or commissions paid by the investor. The issuers of the securities pay brokers to distribute their newly issued securities. New issue securities are sold at par or a price of 100.0 to the investor. Par is the face amount of the investment on which interest is earned. Most investments require a minimum purchase amount. Secondary market securities are sold net to the investor without any commissions, and are usually offered at a market price indicating a discount or premium to par.
The above disclosure is typical for this type of issue. Actual disclosures are published for each new issue in most cases. Look for the related disclosure for each deal on the FISN web site or ask your FISN Registered Representative to send it to you. Current disclosures are made available to purchasers for new issues either by mail or online after the trade date or settlement date. Disclosures for secondary issues were publish at the time of the original settlement and may not be available or up-to-date.
UNIQUE RISKS FOR FIXED RATE CALLABLE CORPORATE SECURITIES
These fixed rate corporate securities present unique risks related to the call features. Callable investments pay a fixed interest rate until called. The issuer can choose to make the call decision at any call date after the initial non-call period for any reason. Investors should be aware of the timing of each call date and the other terms of the security. The risk is that the interest rate payable by the security may be above prevailing market rates. If the rate is above the market and the investment is callable, the underlying security becomes subject to Call Risk since the issuer is motivated to replace the issue with less costly funds. Reinvestment Risk arises when investments are called, causing investors to relinquish a high rate and replace it with a lower, current market rate.
MARKET RISK
All investments held in a securities account are subject to market risk. Market risk is always present but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. This risk arises from the valuation that potential buyers in the market put on an investment that could be offered for sale. The potential risk is that the value may fall and transaction cost may be incurred if the item is put up for sale. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. It is possible that the value could rise as well and then it would be a market value gain. Market risk is an overall risk caused many factors such as interest rate movements, transaction cost and availability of purchasers.
INTEREST RATE RISK
All investments that pay interest or dividends are subject to interest rate risk. CD Alternative Investments sold by FISN are included since their primary purpose is to produce income in the form of interest. Interest rate risk is present if interest rates are moving up from their original level but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. The rule is simple: if rates rise, the “market” value will fall. All purchasers in the secondary market demand the yield on previously issued investments be increased to current levels before they buy them. Yields are increased by reducing the price. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Of course, the value may rise if interest rates fall and then it would be a market value gain if sold.
SECONDARY MARKET AVAILABILITY RISK
All investments are subject to the availability of a secondary market. Income producing investments including CD Alternative Investments sold by FISN are included since they don’t trade such as stocks do on an established “stock market”. The risk is the availability of such an organized and active place to sell your investment. This risk is present if you plan to sell your investment but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. FISN, though not obligated to do so, may maintain a secondary market in these investments after any initial distribution. Simply stated - buyers are needed to sell something. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager.
CALL RISK
Callable investments including callable CD Alternative Investments sold by FISN are subject to call risk. Investors should clearly understand all call provisions. This risk is present even if you plan to hold your investments until maturity. The issuer can “call” or redeem a security on certain call dates prior to maturity. The issuer calls the entire issue regardless of the holder. When called, the issuer returns the full amount with interest up to the call date. Only the issuer can exercise a call, not the account holder or the broker. Issuers usually call a security when rates have fallen and they can replace the funds at a lower rate. The risk is that, even though you get back your full investment, when you go to reinvest your funds, it will earn a lower rate. Calls cannot be predicted even though issuers consider only their own needs and costs. Call risk is difficult to evaluate for monthly statements. It is better estimated by requesting your FISN Investment Manager to seek out potential buyers for the actual investment position.
RE-INVESTMENT RISK
All fixed income investments are subject to re-investment risk. This risk is related to what you do when an investment ends, regardless of the reason. If you plan to continue investing, you have to re-enter the marketplace to find a new, replacement investment. One side of this “risk” is that rates may be lower and/or less product is available. The other side of this “risk” is that rates may be higher and/or more product is available. Strategies to lessen this risk are to time investment maturities close to when you might need the money or to go long when rates appear high and to go short term when rates appear low. Some investors do both by laddering the maturities between long and short terms. Long term maturities capture higher returns paid for longer investments. Shorter maturities keep the remainder of your funds regularly available so rate swings are not missed.
PRINCIPAL RISK
All investments are subject to principal risk. This risk is connected to the issuer. If the financial outlook of issuer declines, the issuer’s credit rating could be downgraded or the issuer could actually default on its debt. With most debt, if the issuer is less creditworthy, the debt will fall in value. And, if the issuer cannot repay the debt at all, the investment may be near worthless. The principal value will diminish in either case.
OVERVIEW
Fixed income securities are less liquid than trading investments such as stocks. Fixed income securities are designed to be held long term, or to maturity, rather than being bought and sold, over and over again. Investors can reclaim their funds by exiting a security through a variety of methods. Although there are no early withdrawal rights, nearly every investment can be sold in an active market and some have a payment at death feature.
EARLY WITHDRAWAL
Fixed income securities held in a brokerage account do not have early withdrawal rights for any reason, like some certificates of deposit.
INVESTMENT SALE
Securities purchased through FISN can be sold in the secondary market for fixed income investments. This market is an “over the counter” market which is actually conducted over the telephone between brokerage firms. There is no mechanism such as the New York Stock Exchange where orders can be entered and a sale is guaranteed. The availability of this secondary market cannot be guaranteed. And, there may not be buyers willing to pay an acceptable price if a security is put up for sale. Also impacting the price is that any investment posted for sale will compete with other fixed income investments being offered at the same time. To start the sale process, the investor has to offer their investment for sale to their broker. The broker will consider whether the brokerage firm wants to hold the security in its own inventory for resale at a later time or to sell it to another brokerage firm on the “street”. The broker will offer a net price to the investor for each security. The FISN broker and other “middle men” will build into their prices a trading incentive to cover their cost and profit objectives. The investor can accept the price or continue to hold the security. There is no assurance how high the “bid” price will be or that this price will be close to estimated prices shown online or printed on recent statements. Prices are simply reflections of the market and business objectives of participating firms.
TRANSFERABILITY
Most securities can be transferred amongst brokerage firms. The receiving firm generally requests the delivering firm to transfer cash and securities between accounts registered in the same ownership capacity. All debits and fees need to be paid prior to a transfer. Every firm has a process including minimums, fees and forms. It is not typical for certificates to be issued and sent to owners of record. Holding certificates outside the brokerage community reduces liquidity, prolongs an ownership transfer and lengthens the time for any sale.
PAYABLE ON DEATH
Some securities have a feature that permits the investment to be paid off following the death of an owner. The standard privileges for refunding apply if the investment is owned by a single person or by a joint account of individuals. Other ownership forms used by individuals may require investigation to determine whether they fit the circumstances necessary for payment on death. Each issuer has its own program of rules and limits since there are no government rules or standards. If applicable, the issuer usually requires a death certificate and a standard form indicating the authority of a living individual to request the payment following death for the deceased person. FISN can assist survivors or estate officials in this process. The return of funds is not immediate and can take several weeks once all the paper work is submitted. The funds are simply returned to the brokerage account. The full amount is returned with interest up to the date of termination.
OVERVIEW
Step Up Rate Callable Corporate Securities are fixed income notes purchased at FISN, a brokerage firm. The interest rate steps up periodically over the life of the investment. FISN searches nationwide for the Step Up Callable notes with the highest return and offers these securities for investment. Corporate securities pay a higher return than agencies. Corporate securities offered by FISN carry an investment grade credit quality and are liquid. Callable investments with steps offer higher rates than non-callable, fixed rate notes, but the issuer has the right to return the funds early. Corporate issuers and brokerage firms team-up to distribute these investments across the nation. FISN has access to the widest inventory from major Wall Street firms. Investors select corporate securities that meet their needs for safety, yield and return of principal. The security is held in a brokerage account.
PROCESS
Investors start by selecting suitable Step Up Rate Callable Corporate Securities for investment and then open a standard brokerage account at FISN in their name. A brokerage account can hold many corporate securities from any corporate issuer, for instance, to construct a laddered portfolio. The investor wires funds or sends a check to fund this new account. FISN sends new account paperwork and purchase confirmations to the investor. The brokerage forms are completed and the transaction confirmation is verified. Only one account needs to be opened for each ownership category. Paperwork is returned to FISN along with the required identification.
CREDIT QUALITY Issuers of Step Up Callable Corporate Securities offered by FISN carry an Investment Grade rating. A credit rating is the measurement of the financial strength of a bond issuer. This measurement helps an investor to understand an issuer’s ability to make timely interest payments and repay the investment principal upon maturity. Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies. The notes are not bank deposits and are not FDIC insured. Principal is protected at maturity by the issuer.
The following is an explanation of the top credit ratings. The rating for each individual investment should be evaluated based the rating criteria. Credit ratings fluctuate with business conditions. Upgrades and downgrades in credit ratings change the risk profile of issuers and possibility the market prices of their securities.
Long Term Credit Ratings
Investment Grade AAA ratings denote the highest rating assigned. This rating is assigned to the "best" credit risk relative to all other issuers or issues.
AA ratings denote a very strong credit risk relative to other issuers or issues. The credit risk inherent in these financial commitments differs only slightly from the highest rated issuers or issues.
A ratings denote a strong credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions may affect the capacity for timely repayment of these financial commitments to a greater degree than for financial commitments denoted by a higher rated category.
BBB ratings denote an adequate credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment of these financial commitments than for financial commitments denoted by a higher rated category.
Below Investment Grade BB ratings denote a fairly weak credit risk relative to other issuers or issues. The payment of the financial commitments is uncertain to some degree and capacity for timely repayment remains more vulnerable to adverse economic change over time.
B ratings denote a significantly weak credit risk relative to other issuers or issues in the country. Financial commitments are currently being met but a limited margin of safety remains and capacity for continued timely payments is contingent upon a sustained, favorable business and economic environment.
See Corporate Bond Ratings chart for a simple description and comparison of credit quality ratings issued by S&P, Moody’s and Fitch.
STEP-UP FEATURES
Step Up corporate notes pay interest at a fixed rate for each period and then step-up to a new, higher rate of interest for the next period. Interest is paid on a semi-annual or monthly basis into the brokerage account. At each step-up point these notes are usually callable. Key information is the interest rate and dates for each step period.
CALLABLE FEATURES
Callable corporate securities are unsecured and un-subordinated obligations of the corporate issuer. These notes offer alternative investment opportunities to traditional CDs with yields higher than government agency securities. The issuers are major U. S. corporations and are not FDIC insured like banks. Callable notes have an initial non-callable term and a callable term. The interest rate is fixed up-front for each step-up period and cannot change until the next step. The interest is paid on a semi-annual or monthly basis into the brokerage account where it can continue to earn interest in a money market fund account. At the end of the non-callable period, the security may be called for the full amount of the investment. When called, the issuer returns the amount to the brokerage account with full interest to date. If not called, it remains callable, usually every 6 months. Only the issuer can make the call decision, not the account holder or the broker. The security will continue to pay interest for the full, possible term if it is never called. Key information is the name of the issuer, the issuer credit quality, the first call date, subsequent call dates and the final stated maturity at the end of the possible term. A new selection of terms and rates from many issuers is offered each week by FISN, subject to availability and price. There is no early withdrawal permitted but the note can be sold in the secondary market or redeemed at par upon the death of the owner or co-owner, if the issuer permits. Securities sold prior to maturity are subject to market conditions and could result in a loss.
Interest can be disbursed immediately or periodically via checks or electronic funds transmission straight to your local bank. Available cash also can be withdrawn from the account via checks, automatic teller machines or debit cards. There may be fees for accounts with ATM or debit cards.
ID REQUIREMENTS
Brokerage accounts are opened at FISN’s brokerage division, First Internet Securities Network. Securities in FISN accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company. FISN is required under U.S. government rules to verify ownership of all accounts. Individuals are required to provide a copy of a government-issued photo identification. Business accounts, trusts and other non-individual accounts have special documentation requirements.
FEES
There are no investment fees or commissions paid by the investor. The issuers of the securities pay brokers to distribute their newly issued securities. New issue securities are sold at par or a price of 100.0 to the investor. Par is the face amount of the investment on which interest is earned. Most investments require a minimum purchase amount. Secondary market securities are sold net to the investor without any commissions, and are usually offered at a market price indicating a discount or premium to par.
The above disclosure is typical for this type of issue. Actual disclosures are published for each new issue in most cases. Look for the related disclosure for each deal on the FISN web site or ask your FISN Registered Representative to send it to you. Current disclosures are made available to purchasers for new issues either by mail or online after the trade date or settlement date. Disclosures for secondary issues were publish at the time of the original settlement and may not be available or up-to-date.
UNIQUE RISKS FOR STEP-UP RATE CALLABLE CORPORATE SECURITIES
These corporate securities present unique risks related to the call features. Callable investments pay interest until called. The issuer can choose to make the call decision at any call date after the initial non-call period for any reason. Investors should be aware of the timing of each call date and the other terms of the security. The risk is that the interest rate payable by the security at any time may be above prevailing market rates. If the rate is above the market and the investment is callable, the underlying security becomes subject to Call Risk since the issuer is motivated to replace the issue with less costly funds. Reinvestment Risk arises when investments are called, causing investors to relinquish a high rate and replace it with a lower, current market rate.
These corporate securities also present unique risks related to the step-up features. Step-up securities will pay an initial rate of interest for a definite period and then “step-up” to a new, higher rate. Step-up investments have multiple rate steps at predetermined intervals. Investors should be aware of the timing and interest rates of all steps. The risk is that the stepped-up rate may be above prevailing market rates. If the rate is above the market and the investment is callable, the underlying security becomes subject to the same Call Risk since the issuer is motivated to replace the issue with less costly funds. The initial rate from the first step is not the yield to maturity (YTM). The YTM on a step-up investment is always higher and will depend upon when the security is redeemed and how many steps are actually utilized.
MARKET RISK
All investments held in a securities account are subject to market risk. Market risk is always present but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. This risk arises from the valuation that potential buyers in the market put on an investment that could be offered for sale. The potential risk is that the value may fall and transaction cost may be incurred if the item is put up for sale. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. It is possible that the value could rise as well and then it would be a market value gain. Market risk is an overall risk caused many factors such as interest rate movements, transaction cost and availability of purchasers.
INTEREST RATE RISK
All investments that pay interest or dividends are subject to interest rate risk. CD Alternative Investments sold by FISN are included since their primary purpose is to produce income in the form of interest. Interest rate risk is present if interest rates are moving up from their original level but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. The rule is simple: if rates rise, the “market” value will fall. All purchasers in the secondary market demand the yield on previously issued investments be increased to current levels before they buy them. Yields are increased by reducing the price. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Of course, the value may rise if interest rates fall and then it would be a market value gain if sold.
SECONDARY MARKET AVAILABILITY RISK
All investments are subject to the availability of a secondary market. Income producing investments including CD Alternative Investments sold by FISN are included since they don’t trade such as stocks do on an established “stock market”. The risk is the availability of such an organized and active place to sell your investment. This risk is present if you plan to sell your investment but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. FISN, though not obligated to do so, may maintain a secondary market in these investments after any initial distribution. Simply stated - buyers are needed to sell something. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager.
CALL RISK
Callable investments including callable CD Alternative Investments sold by FISN are subject to call risk. Investors should clearly understand all call provisions. This risk is present even if you plan to hold your investments until maturity. The issuer can “call” or redeem a security on certain call dates prior to maturity. The issuer calls the entire issue regardless of the holder. When called, the issuer returns the full amount with interest up to the call date. Only the issuer can exercise a call, not the account holder or the broker. Issuers usually call a security when rates have fallen and they can replace the funds at a lower rate. The risk is that, even though you get back your full investment, when you go to reinvest your funds, it will earn a lower rate. Calls cannot be predicted even though issuers consider only their own needs and costs. Call risk is difficult to evaluate for monthly statements. It is better estimated by requesting your FISN Investment Manager to seek out potential buyers for the actual investment position.
RE-INVESTMENT RISK
All fixed income investments are subject to re-investment risk. This risk is related to what you do when an investment ends, regardless of the reason. If you plan to continue investing, you have to re-enter the marketplace to find a new, replacement investment. One side of this “risk” is that rates may be lower and/or less product is available. The other side of this “risk” is that rates may be higher and/or more product is available. Strategies to lessen this risk are to time investment maturities close to when you might need the money or to go long when rates appear high and to go short term when rates appear low. Some investors do both by laddering the maturities between long and short terms. Long term maturities capture higher returns paid for longer investments. Shorter maturities keep the remainder of your funds regularly available so rate swings are not missed.
PRINCIPAL RISK
All investments are subject to principal risk. This risk is connected to the issuer. If the financial outlook of issuer declines, the issuer’s credit rating could be downgraded or the issuer could actually default on its debt. With most debt, if the issuer is less creditworthy, the debt will fall in value. And, if the issuer cannot repay the debt at all, the investment may be near worthless. The principal value will diminish in either case.
OVERVIEW
Fixed income securities are less liquid than trading investments such as stocks. All fixed income securities, including those with rates that step-up, are designed to be held long term, or to maturity, rather than being bought and sold, over and over again. Investors can reclaim their funds by exiting a security through a variety of methods. Although there are no early withdrawal rights, nearly every investment can be sold in an active market and some have a payment at death feature.
EARLY WITHDRAWAL
Fixed income securities, including those with rates that step-up, held in a brokerage account do not have early withdrawal rights for any reason, like some certificates of deposit.
INVESTMENT SALE
Securities purchased through FISN can be sold in the secondary market for fixed income investments. This market is an “over the counter” market which is actually conducted over the telephone between brokerage firms. There is no mechanism such as the New York Stock Exchange where orders can be entered and a sale is guaranteed. The availability of this secondary market cannot be guaranteed. And, there may not be buyers willing to pay an acceptable price if a security is put up for sale. Also impacting the price is that any investment posted for sale will compete with other fixed income investments being offered at the same time. To start the sale process, the investor has to offer their investment for sale to their broker. The broker will consider whether the brokerage firm wants to hold the security in its own inventory for resale at a later time or to sell it to another brokerage firm on the “street”. The broker will offer a net price to the investor for each security. The FISN broker and other “middle men” will build into their prices a trading incentive to cover their cost and profit objectives. The investor can accept the price or continue to hold the security. There is no assurance how high the “bid” price will be or that this price will be close to estimated prices shown online or printed on recent statements. Prices are simply reflections of the market and business objectives of participating firms.
TRANSFERABILITY
Most securities can be transferred amongst brokerage firms. The receiving firm generally requests the delivering firm to transfer cash and securities between accounts registered in the same ownership capacity. All debits and fees need to be paid prior to a transfer. Every firm has a process including minimums, fees and forms. It is not typical for certificates to be issued and sent to owners of record. Holding certificates outside the brokerage community reduces liquidity, prolongs an ownership transfer and lengthens the time for any sale.
PAYABLE ON DEATH
Some securities have a feature that permits the investment to be paid off following the death of an owner. The standard privileges for refunding apply if the investment is owned by a single person or by a joint account of individuals. Other ownership forms used by individuals may require investigation to determine whether they fit the circumstances necessary for payment on death. Each issuer has its own program of rules and limits since there are no government rules or standards. If applicable, the issuer usually requires a death certificate and a standard form indicating the authority of a living individual to request the payment following death for the deceased person. FISN can assist survivors or estate officials in this process. The return of funds is not immediate and can take several weeks once all the paper work is submitted. The funds are simply returned to the brokerage account. The full amount is returned with interest up to the date of termination.
OVERVIEW
Floating Rate Corporate Securities are variable-rate notes purchased at FISN, a brokerage firm. The interest rate is re-computed, usually monthly, over the life of the investment. FISN searches nationwide for the Floating Rate notes with the highest returns and offers these securities for investment. Floating Rate notes offer a real return that keeps them up with inflation. Most notes are tied to the change in the CPI. Corporate securities offered by FISN carry an investment-grade credit quality. Corporate issuers and brokerage firms team-up to distribute these investments across the nation. FISN has access to the widest inventory from major Wall Street firms. Investors select corporate securities that meet their needs for safety, yield and return of principal. The security is held in a brokerage account.
PROCESS
Investors start by selecting suitable Floating Rate Corporate Securities for investment and then open a standard brokerage account at FISN in their name. A brokerage account can hold many corporate securities from any corporate issuer based upon any type of floating rate structure. The investor wires funds or sends a check to fund this new account. FISN sends new account paperwork and purchase confirmations to the investor. The brokerage forms are completed and the transaction confirmation is verified. Only one account needs to be opened for each ownership category. Paperwork is returned to FISN along with the required identification.
CREDIT QUALITY Issuers of Floating Rate Corporate Securities offered by FISN carry an Investment Grade rating. A credit rating is the measurement of the financial strength of a bond issuer. This measurement helps an investor to understand an issuer’s ability to make timely interest payments and repay the investment principal upon maturity. Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies. The notes are not bank deposits and are not FDIC insured. Principal is protected at maturity by the issuer.
The following is an explanation of the top credit ratings. The rating for each individual investment should be evaluated based the rating criteria. Credit ratings fluctuate with business conditions. Upgrades and downgrades in credit ratings change the risk profile of issuers and possibility the market prices of their securities.
Long Term Credit Ratings
Investment Grade AAA ratings denote the highest rating assigned. This rating is assigned to the "best" credit risk relative to all other issuers or issues.
AA ratings denote a very strong credit risk relative to other issuers or issues. The credit risk inherent in these financial commitments differs only slightly from the highest rated issuers or issues.
A ratings denote a strong credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions may affect the capacity for timely repayment of these financial commitments to a greater degree than for financial commitments denoted by a higher rated category.
BBB ratings denote an adequate credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment of these financial commitments than for financial commitments denoted by a higher rated category.
Below Investment Grade BB ratings denote a fairly weak credit risk relative to other issuers or issues. The payment of the financial commitments is uncertain to some degree and capacity for timely repayment remains more vulnerable to adverse economic change over time.
B ratings denote a significantly weak credit risk relative to other issuers or issues in the country. Financial commitments are currently being met but a limited margin of safety remains and capacity for continued timely payments is contingent upon a sustained, favorable business and economic environment.
See Corporate Bond Ratings chart for a simple description and comparison of credit quality ratings issued by S&P, Moody’s and Fitch.
INVESTMENT FEATURES
Floating Rate Corporate Securities pay interest at a variable rate over the life of the investment. They are unsecured and un-subordinated obligations of the corporate issuer. These notes offer alternative investment opportunities to traditional CDs, with yields higher than floating rate CDs. The issuers are major U. S. corporations and are not FDIC insured, like banks. Interest is paid monthly into the brokerage account where it can continue to earn interest in a money market fund account. These notes usually have a fixed term. Each month the interest rate is recalculated in several possible ways. Some notes pay interest monthly at a Base Rate plus the monthly CPI change that reflects the year-over-year change in the CPI. Or, in another fashion, the interest rate can be calculated with a multiplier times the CPI change. The “change” is typically the inflation over the 12 month period ending three months ago. The Consumer Price Index (CPI) is published monthly by the U.S. Bureau of Labor Statistics. In some structures other indexes are used instead of the CPI to calculate the change. The rate for the initial period is always known prior to investment. In effect, the actual rate "floats" up and down with current inflation on a monthly basis. The adjustment may be positive or negative. In the event of a decrease in the CPI, the combined rate will fall, but not below 0.00%. Key information is the name of the issuer, the issuer credit quality, the specific index with any lag period, frequency of adjustment, the Base Rate or Multiplier and the maturity date. Each deal could be different so it is important to understand the details of each offer.
Interest can be disbursed immediately or periodically via checks or electronic funds transmission straight to your local bank. Available cash also can be withdrawn from the account via checks, automatic teller machines or debit cards. There may be fees for accounts with ATM or debit cards.
ID REQUIREMENTS
Brokerage accounts are opened at FISN’s brokerage division, First Internet Securities Network. Securities in FISN accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company. FISN is required under U.S. government rules to verify ownership of all accounts. Individuals are required to provide a copy of a government-issued photo identification. Business accounts, trusts and other non-individual accounts have special documentation requirements.
FEES
There are no investment fees or commissions paid by the investor. The issuers of the securities pay brokers to distribute their newly issued securities. New issue securities are sold at par or a price of 100.0 to the investor. Par is the face amount of the investment on which interest is earned. Most investments require a minimum purchase amount. Secondary market securities are sold net to the investor without any commissions, and are usually offered at a mark et price indicating a discount or premium to par.
The above disclosure is typical for this type of issue. Actual disclosures are published for each new issue in most cases. Look for the related disclosure for each deal on the FISN web site or ask your FISN Registered Representative to send it to you. Current disclosures are made available to purchasers for new issues either by mail or online after the trade date or settlement date. Disclosures for secondary issues were publish at the time of the original settlement and may not be available or up-to-date.
UNIQUE RISKS FOR FLOATING RATE CORPORATE SECURITIES
These floating rate securities present unique risks related to the rate adjustment features. The adjustment formula is designed to produce a real return. The risk is that the formula does not fully accomplish this mission. The index may understate cost factors or delay the impact. The market will devalue a sub-performing security.
MARKET RISK
All investments held in a securities account are subject to market risk. Market risk is always present but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. This risk arises from the valuation that potential buyers in the market put on an investment that could be offered for sale. The potential risk is that the value may fall and transaction cost may be incurred if the item is put up for sale. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. It is possible that the value could rise as well and then it would be a market value gain. Market risk is an overall risk caused many factors such as interest rate movements, transaction cost and availability of purchasers.
INTEREST RATE RISK
All investments that pay interest or dividends are subject to interest rate risk. CD Alternative Investments sold by FISN are included since their primary purpose is to produce income in the form of interest. Interest rate risk is present if interest rates are moving up from their original level but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. The rule is simple: if rates rise, the “market” value will fall. All purchasers in the secondary market demand the yield on previously issued investments be increased to current levels before they buy them. Yields are increased by reducing the price. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Of course, the value may rise if interest rates fall and then it would be a market value gain if sold.
SECONDARY MARKET AVAILABILITY RISK
All investments are subject to the availability of a secondary market. Income producing investments including CD Alternative Investments sold by FISN are included since they don’t trade such as stocks do on an established “stock market”. The risk is the availability of such an organized and active place to sell your investment. This risk is present if you plan to sell your investment but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. FISN, though not obligated to do so, may maintain a secondary market in these investments after any initial distribution. Simply stated - buyers are needed to sell something. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager.
CALL RISK
These investments are typically not callable.
RE-INVESTMENT RISK
All fixed income investments are subject to re-investment risk. This risk is related to what you do when an investment ends, regardless of the reason. If you plan to continue investing, you have to re-enter the marketplace to find a new, replacement investment. One side of this “risk” is that rates may be lower and/or less product is available. The other side of this “risk” is that rates may be higher and/or more product is available. Strategies to lessen this risk are to time investment maturities close to when you might need the money or to go long when rates appear high and to go short term when rates appear low. Some investors do both by laddering the maturities between long and short terms. Long term maturities capture higher returns paid for longer investments. Shorter maturities keep the remainder of your funds regularly available so rate swings are not missed.
PRINCIPAL RISK
All investments are subject to principal risk. This risk is connected to the issuer. If the financial outlook of issuer declines, the issuer’s credit rating could be downgraded or the issuer could actually default on its debt. With most debt, if the issuer is less creditworthy, the debt will fall in value. And, if the issuer cannot repay the debt at all, the investment may be near worthless. The principal value will diminish in either case.
OVERVIEW
Fixed income securities are less liquid than trading investments such as stocks. Fixed income securities, including those with rates that adjust with inflation, are designed to be held long term, or to maturity, rather than being bought and sold, over and over again. Investors can reclaim their funds by exiting a security through a variety of methods. Although there are no early withdrawal rights, nearly every investment can be sold in an active market and some have a payment at death feature.
EARLY WITHDRAWAL
Floating rate securities held in a brokerage account do not have early withdrawal rights for any reason, like some certificates of deposit.
INVESTMENT SALE
Securities purchased through FISN can be sold in the secondary market for fixed income investments. This market is an “over the counter” market which is actually conducted over the telephone between brokerage firms. There is no mechanism such as the New York Stock Exchange where orders can be entered and a sale is guaranteed. The availability of this secondary market cannot be guaranteed. And, there may not be buyers willing to pay an acceptable price if a security is put up for sale. Also impacting the price is that any investment posted for sale will compete with other fixed income investments being offered at the same time. To start the sale process, the investor has to offer their investment for sale to their broker. The broker will consider whether the brokerage firm wants to hold the security in its own inventory for resale at a later time or to sell it to another brokerage firm on the “street”. The broker will offer a net price to the investor for each security. The FISN broker and other “middle men” will build into their prices a trading incentive to cover their cost and profit objectives. The investor can accept the price or continue to hold the security. There is no assurance how high the “bid” price will be or that this price will be close to estimated prices shown online or printed on recent statements. Prices are simply reflections of the market and business objectives of participating firms.
TRANSFERABILITY
Most securities can be transferred amongst brokerage firms. The receiving firm generally requests the delivering firm to transfer cash and securities between accounts registered in the same ownership capacity. All debits and fees need to be paid prior to a transfer. Every firm has a process including minimums, fees and forms. It is not typical for certificates to be issued and sent to owners of record. Holding certificates outside the brokerage community reduces liquidity, prolongs an ownership transfer and lengthens the time for any sale.
PAYABLE ON DEATH
Some securities have a feature that permits the investment to be paid off following the death of an owner. The standard privileges for refunding apply if the investment is owned by a single person or by a joint account of individuals. Other ownership forms used by individuals may require investigation to determine whether they fit the circumstances necessary for payment on death. Each issuer has its own program of rules and limits since there are no government rules or standards. If applicable, the issuer usually requires a death certificate and a standard form indicating the authority of a living individual to request the payment following death for the deceased person. FISN can assist survivors or estate officials in this process. The return of funds is not immediate and can take several weeks once all the paper work is submitted. The funds are simply returned to the brokerage account. The full amount is returned with interest up to the date of termination.
Non
Callable
Term
Possible
Term
Floating
Rate
Type
Interest
Rate
Issuer
Credit Rating Disclosure
Minimum
Investment
Buy
1.0 Yrs
15.0 Yrs
CMS Interest Rate Steepener
Yr 1 Interest is paid semi-annually in the first year at a fixed rate of 11.00%.
Yrs 2-15 Interest is paid semi-annually in years 2 thru 15 at a variable rate of 5.5 times the positive difference between the 10Yr Constant Maturity Swap (CMS) Rate and the 2Yr Constant Maturity Swap (CMS) Rate (Positive Yield Curve) minus .50% as observed 2 business days before the start of the period. If the 2Yr CMS Rate is greater than 10Yr CMS Rate (Negative Yield Curve) on the observation date no interest is paid for the entire period. Cap of 15.00% per annum. Not FDIC insured. Disclosure
6-Month USD LIBOR and S&P 500 Index Range Accrual Notes
Yrs 1-15 Interest is accrued daily and paid semi-annually at a rate of9.00% for every day that two conditions are met. The first condition is that the 6 Month USD LIBOR rate is between 0% and 7%. The second condition is that the closing level of the S&P 500 Index is above 885. No interest is accrued on any day when either condition is not met. This is callable starting in 6 months and semi-annually thereafter.
6-Month USD LIBOR and S&P 500 Index Range Accrual Notes
Yr 1 Interest is paid quarterly in the first year at a fixed rate of 10.00% if not called starting in 3 months.
Yrs 2-15 Interest is accrued daily and paid quarterly in years 2 thru 15 at a variable rate of 10.00% for each day two conditions are met. The first condition is that the 6 month libor rate is between 0-7%. The second condition is that the closing level of the S&P 500 Index is above or equal to 850. No interest is accrued on any day when either condition is not met. Not FDIC insured. Disclosure
Yr 1 Interest is paid quarterly in the first year at a fixed rate of 10.00%.
Yrs 2-20 Interest is paid quarterly in years 2 thru 20 at a variable rate of 4 times the positive difference between the 10Yr Constant Maturity Swap (CMS) Rate and the 2Yr Constant Maturity Swap (CMS) Rate (Positive Yield Curve) as observed 2 business days before the start of the period. If the 2Yr CMS Rate is greater than 10Yr CMS Rate (Negative Yield Curve) on the observation date no interest is paid for the entire period. Cap of 10.00%. Not FDIC insured. Disclosure
OVERVIEW Fixed Rate, Structured & Exchangeable Corporate Securities are short-term, fixed income notes purchased at FISN, a brokerage firm. These structured notes are each tied to the performance of a referenced equity security or index. FISN searches nationwide for the Exchangeable notes with the highest return and offers these securities for investment. These notes disburse a fixed payment, monthly or quarterly, comprised of an interest component and a risk component tied to the volatility of the share price of the referenced equity. A credit quality evaluation looks at the rating of the issuer and the referenced equity. If the share price is more volatile, the payout is higher. At maturity, either the investment principal is returned or referenced stock is delivered in exchange. Corporate issuers and brokerage firms team-up to distribute these investments across the nation. FISN has access to the widest inventory from major Wall Street firms. Investors select corporate securities that meet their needs for safety, yield and return of principal. The security is held in a brokerage account.
PROCESS Investors start by selecting suitable Fixed Rate, Structured & Exchangeable Corporate Securities for investment and then open a standard brokerage account at FISN in their name. A brokerage account can hold many corporate securities from any corporate issuer linked to any reference stock. The investor wires funds or sends a check to fund this new account. FISN sends new account paperwork and purchase confirmations to the investor. The brokerage forms are completed and the transaction confirmation is verified. Only one account needs to be opened for each ownership category. Paperwork is returned to FISN along with the required identification.
CREDIT QUALITY
International bank issuers of Fixed Rate, Structured & Exchangeable Corporate Securities offered by FISN carry an Investment Grade rating. A credit rating is the measurement of the financial strength of a bond issuer. This measurement helps an investor to understand an issuer’s ability to make timely interest payments and repay the investment principal upon maturity. Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies. The notes are not bank deposits and are not FDIC insured.
The Issuer Credit Rating is an indication of the credit standing of the issuer and not for the referenced Exchangeable Equity Security. The creditworthiness of the issuer does not affect or enhance the likely performance of the investment other than the ability of the issuer to meet its obligations therein. The notes are not Principal Protected. At maturity, the investor may receive a return of the original cash principal or stock of the referenced exchangeable security, based upon the performance of the referenced security during the life of the note. If stock is returned it will be worth less than the original investment.
The following is an explanation of the top credit ratings. The rating for each individual investment should be evaluated based the rating criteria. Credit ratings fluctuate with business conditions. Upgrades and downgrades in credit ratings change the risk profile of issuers and possibility the market prices of their securities.
Long Term Credit Ratings
Investment Grade AAA ratings denote the highest rating assigned. This rating is assigned to the "best" credit risk relative to all other issuers or issues.
AA ratings denote a very strong credit risk relative to other issuers or issues. The credit risk inherent in these financial commitments differs only slightly from the highest rated issuers or issues.
A ratings denote a strong credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions may affect the capacity for timely repayment of these financial commitments to a greater degree than for financial commitments denoted by a higher rated category.
BBB ratings denote an adequate credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment of these financial commitments than for financial commitments denoted by a higher rated category.
Below Investment Grade BB ratings denote a fairly weak credit risk relative to other issuers or issues. The payment of the financial commitments is uncertain to some degree and capacity for timely repayment remains more vulnerable to adverse economic change over time.
B ratings denote a significantly weak credit risk relative to other issuers or issues in the country. Financial commitments are currently being met but a limited margin of safety remains and capacity for continued timely payments is contingent upon a sustained, favorable business and economic environment.
See Corporate Bond Ratings chart for a simple description and comparison of credit quality ratings issued by S&P, Moody’s and Fitch.
INVESTMENT FEATURES
Fixed Rate, Structured & Exchangeable Corporate securities are unsecured and un-subordinated obligations of the corporate issuer. These notes are issued by large, worldwide banking and investment companies for terms usually of three months to one year. The notes are not FDIC insured. The issuer has no relationship to the exchangeable equity security or index which is used as a reference for the investment return. These structured corporate notes pay interest monthly or quarterly for the full term. Interest rates are quoted on a per annum basis. In some cases, the notes will be listed on the American Stock Exchange. At maturity, the note is redeemed in cash for the original purchase price or exchanged for the common stock of the referenced exchangeable equity issue. Only the issuer, not the investor or the broker, can make the redemption payoff determination. At the maturity, if the Final Share Price of the reference common stock or index is higher than the Initial Share Price, or never fallen below the Downside Protection level of the Initial Share Price during the term, a cash payment is made. Or, if the Final Share Price at maturity has fallen below the Initial Share Price, and the price of the reference equity or index has fallen below the protection level of the Initial Share Price sometime during the term, common stock of the referenced company is returned at a price ratio established at issuance. (Downside Protection is breached when the referenced shares have traded or closed below the protection level during the term.) The notes are not principal protected since the value of the investment will be less if shares are paid out rather than cash. The Issuer Credit Quality is an indication of the credit standing of the issuer and not of the Exchangeable Equity Security. The creditworthiness of the issuer does not affect or enhance the likely performance of the investment other than the ability of the issuer to meet its obligations therein. Key information is issuer, the reference security, the credit quality of both the issuer and reference security, the interest rate, the downside protection price level, whether the protection price is breached by a daily closing price or any trade price during the term, and the maturity date. There is no early withdrawal permitted but the notes can be sold in the secondary market. Notes sold prior to maturity are subject to market conditions and could result in a loss. They are sold subject to availability and price.
Interest can be disbursed immediately or periodically via checks or electronic funds transmission straight to your local bank. Available cash also can be withdrawn from the account via checks, automatic teller machines or debit cards.There may be fees for accounts with ATM or debit cards.
Read each linked Disclosure for a complete explanation of each referenced security or index and each issue.
ID REQUIREMENTS
Brokerage accounts are opened at FISN’s brokerage division, First Internet Securities Network. Securities in FISN accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company. FISN is required under U.S. government rules to verify ownership of all accounts. Individuals are required to provide a copy of a government-issued photo identification. Business accounts, trusts and other non-individual accounts have special documentation requirements.
FEES There are no investment fees or commissions paid by the investor. The issuers of the securities pay brokers to distribute their newly issued securities. New issue securities are sold at par or a price of 100.0 to the investor. Par is the face amount of the investment on which interest is earned. Most investments require a minimum purchase amount . Secondary market securities are sold net to the investor without any commissions, and are usually offered at a market price indicating a discount or premium to par.
The above disclosure is typical for this type of issue. Actual disclosures are published for each new issue in most cases. Look for the related disclosure for each deal on the FISN web site or ask your FISN Registered Representative to send it to you. Current disclosures are made available to purchasers for new issues either by mail or online after the trade date or settlement date. Disclosures for secondary issues were publish at the time of the original settlement and may not be available or up-to-date.
UNIQUE RISKS FOR FIXED RATE, STRUCTURED & EXCHANGEABLE CORPORATE SECURITIES
These fixed rate corporate securities present unique risks related to the lack of principal protection at maturity. This risk arises from the referenced security and not the issuer. If the value of the reference security is down from the initial value to the final value at maturity and the downside protection price level was penetrated, stock of the reference security will be returned in exchange for the principal. The risk is that the stock will be worth less than the principal. The stock can be held but if it is sold at this time there will be real loss in principal. The higher interest rate paid on the security may make up for any loss.
MARKET RISK
All investments held in a securities account are subject to market risk. Market risk is always present but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. This risk arises from the valuation that potential buyers in the market put on an investment that could be offered for sale. The potential risk is that the value may fall and transaction cost may be incurred if the item is put up for sale. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. It is possible that the value could rise as well and then it would be a market value gain. Market risk is an overall risk caused many factors such as interest rate movements, transaction cost and availability of purchasers.
INTEREST RATE RISK
All investments that pay interest or dividends are subject to interest rate risk. CD Alternative Investments sold by FISN are included since their primary purpose is to produce income in the form of interest. Interest rate risk is present if interest rates are moving up from their original level but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. The rule is simple: if rates rise, the “market” value will fall. All purchasers in the secondary market demand the yield on previously issued investments be increased to current levels before they buy them. Yields are increased by reducing the price. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Of course, the value may rise if interest rates fall and then it would be a market value gain if sold.
SECONDARY MARKET AVAILABILITY RISK
All investments are subject to the availability of a secondary market. Income producing investments including CD Alternative Investments sold by FISN are included since they don’t trade such as stocks do on an established “stock market”. The risk is the availability of such an organized and active place to sell your investment. This risk is present if you plan to sell your investment but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. FISN, though not obligated to do so, may maintain a secondary market in these investments after any initial distribution. Simply stated - buyers are needed to sell something. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager.
CALL RISK
These investments are typically not callable.
RE-INVESTMENT RISK
All fixed income investments are subject to re-investment risk. This risk is related to what you do when an investment ends, regardless of the reason. If you plan to continue investing, you have to re-enter the marketplace to find a new, replacement investment. One side of this “risk” is that rates may be lower and/or less product is available. The other side of this “risk” is that rates may be higher and/or more product is available. Strategies to lessen this risk are to time investment maturities close to when you might need the money or to go long when rates appear high and to go short term when rates appear low. Some investors do both by laddering the maturities between long and short terms. Long term maturities capture higher returns paid for longer investments. Shorter maturities keep the remainder of your funds regularly available so rate swings are not missed.
PRINCIPAL RISK
All investments are subject to principal risk. This risk is connected to the issuer. If the financial outlook of issuer declines, the issuer’s credit rating could be downgraded or the issuer could actually default on its debt. With most debt, if the issuer is less creditworthy, the debt will fall in value. And, if the issuer cannot repay the debt at all, the investment may be near worthless. The principal value will diminish in either case.
Fixed income securities are less liquid than trading investments such as stocks. Fixed income securities are designed to be held to maturity, rather than being bought and sold, over and over again. Investors can reclaim their funds by exiting a security through a variety of methods. Although there are no early withdrawal rights, nearly every investment can be sold in an active market.
EARLY WITHDRAWAL
Fixed income securities held in a brokerage account do not have early withdrawal rights for any reason, like some certificates of deposit.
INVESTMENT SALE
Securities purchased through FISN can be sold in the secondary market for fixed income investments. This market is an “over the counter” market which is actually conducted over the telephone between brokerage firms. There is no mechanism such as the New York Stock Exchange where orders can be entered and a sale is guaranteed. The availability of this secondary market cannot be guaranteed. And, there may not be buyers willing to pay an acceptable price if a security is put up for sale. Also impacting the price is that any investment posted for sale will compete with other fixed income investments being offered at the same time. To start the sale process, the investor has to offer their investment for sale to their broker. The broker will consider whether the brokerage firm wants to hold the security in its own inventory for resale at a later time or to sell it to another brokerage firm on the “street”. The broker will offer a net price to the investor for each security. The FISN broker and other “middle men” will build into their prices a trading incentive to cover their cost and profit objectives. The investor can accept the price or continue to hold the security. There is no assurance how high the “bid” price will be or that this price will be close to estimated prices shown online or printed on recent statements. Prices are simply reflections of the market and business objectives of participating firms.
TRANSFERABILITY
Most securities can be transferred amongst brokerage firms. The receiving firm generally requests the delivering firm to transfer cash and securities between accounts registered in the same ownership capacity. All debits and fees need to be paid prior to a transfer. Every firm has a process including minimums, fees and forms. It is not typical for certificates to be issued and sent to owners of record. Holding certificates outside the brokerage community reduces liquidity, prolongs an ownership transfer and lengthens the time for any sale.
PAYABLE ON DEATH
Some securities have a feature that permits the investment to be paid off following the death of an owner. Fixed Rate, Structured & Exchangeable Corporate Securities typically don’t have this feature.
OVERVIEW
Step Up Rate Callable Agency Securities are fixed income notes purchased at FISN, a brokerage firm. The interest rate steps up periodically over the life of the investment. FISN searches nationwide for the Step Up Callable notes with the highest return and offers these securities for investment. Agency securities have a high credit quality and are liquid. Callable investments with steps offer higher rates than non-callable, fixed rate notes, but the issuer has the right to return the funds early. Agency issuers and brokerage firms team-up to distribute these investments across the nation. FISN has access to the widest inventory from major Wall Street firms. Investors select agency securities that meet their needs for safety, yield and return of principal. The security is held in a brokerage account.
PROCESS
Investors start by selecting suitable Step Up Rate Callable Agency Securities for investment and then open a standard brokerage account at FISN in their name. A brokerage account can hold many agency securities from any agency issuer, for instance, to construct a laddered portfolio. The investor wires funds or sends a check to fund this new account. FISN sends new account paperwork and purchase confirmations to the investor. The brokerage forms are completed and the transaction confirmation is verified. Only one account needs to be opened for each ownership category. Paperwork is returned to FISN along with the required identification.
CREDIT QUALITY Agencies or U.S. Government sponsored enterprises (GSE) carry the highest credit rating if their bonds are rated. A credit rating is the measurement of the financial strength of a bond issuer. This measurement helps an investor to understand an issuer’s ability to make timely interest payments and repay the investment principal upon maturity. Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies. The notes are not bank deposits and are not FDIC insured. Principal is protected at maturity by the issuer.
The following is an explanation of the top credit ratings. The rating for each individual investment should be evaluated based the rating criteria. Credit ratings fluctuate with business conditions. Upgrades and downgrades in credit ratings change the risk profile of issuers and possibility the market prices of their securities.
Long Term Credit Ratings
Investment Grade AAA ratings denote the highest rating assigned. This rating is assigned to the "best" credit risk relative to all other issuers or issues.
AA ratings denote a very strong credit risk relative to other issuers or issues. The credit risk inherent in these financial commitments differs only slightly from the highest rated issuers or issues.
A ratings denote a strong credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions may affect the capacity for timely repayment of these financial commitments to a greater degree than for financial commitments denoted by a higher rated category.
BBB ratings denote an adequate credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment of these financial commitments than for financial commitments denoted by a higher rated category.
Below Investment Grade BB ratings denote a fairly weak credit risk relative to other issuers or issues. The payment of the financial commitments is uncertain to some degree and capacity for timely repayment remains more vulnerable to adverse economic change over time.
B ratings denote a significantly weak credit risk relative to other issuers or issues in the country. Financial commitments are currently being met but a limited margin of safety remains and capacity for continued timely payments is contingent upon a sustained, favorable business and economic environment.
See Corporate Bond Ratings chart for a simple description and comparison of credit quality ratings issued by S&P, Moody’s and Fitch.
STEP-UP FEATURES
Step Up agencies pay interest at a fixed rate for each period and then step-up to a new, higher rate of interest for the next period. Interest is paid on a semi-annual or monthly basis into the brokerage account. At each step-up point these agencies are usually callable. Key information is the interest rate and dates for each step period.
CALLABLE FEATURES
U.S. Government sponsored enterprises (GSE), referred to as agencies, are alternative investment opportunities to traditional CDs. The issuers are known as “government agencies” but are privately owned corporations created by Congress for a special public purpose. They are not FDIC insured, like banks. Callable agencies have an initial non-callable term and a callable term. The interest rate is fixed up-front for each step-up period and cannot change until the next step. The interest is paid on a semi-annual or monthly basis into the brokerage account where it can continue to earn interest in a money market fund account. At the end of the non-callable period, the security may be called for the full amount of the investment. When called, the issuer returns the amount to the brokerage account with full interest to date. If not called, it remains callable, usually every 6 months. Only the issuer can make the call decision, not the account holder or the broker. The security will continue to pay interest for the full, possible term if it is never called. Some GSE issuers pay interest that is tax free at the state level. Key information is the name of the issuer, the state tax status, the first call date, subsequent call dates and the final stated maturity at the end of the possible term. Investments offered by FISN are sold subject to availability and price. There is no early withdrawal permitted but the investment can be sold in the secondary market. Securities sold prior to maturity are subject to market conditions and could result in a loss.
Interest can be disbursed immediately or periodically via checks or electronic funds transmission straight to your local bank. Available cash also can be withdrawn from the account via checks, automatic teller machines or debit cards. There may be fees for accounts with ATM or debit cards.
ID REQUIREMENTS
Brokerage accounts are opened at FISN’s brokerage division, First Internet Securities Network. Securities in FISN accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company. FISN is required under U.S. government rules to verify ownership of all accounts. Individuals are required to provide a copy of a government-issued photo identification. Business accounts, trusts and other non-individual accounts have special documentation requirements.
FEES
There are no investment fees or commissions paid by the investor. The issuers of the securities pay brokers to distribute their newly issued securities. New issue securities are sold at par or a price of 100.0 to the investor. Par is the face amount of the investment on which interest is earned. Most investments require a minimum purchase amount. Secondary market securities are sold net to the investor without any commissions, and are usually offered at a market price indicating a discount or premium to par.
The above disclosure is typical for this type of issue. Actual disclosures are published for each new issue in most cases. Look for the related disclosure for each deal on the FISN web site or ask your FISN Registered Representative to send it to you. Current disclosures are made available to purchasers for new issues either by mail or online after the trade date or settlement date. Disclosures for secondary issues were publish at the time of the original settlement and may not be available or up-to-date.
UNIQUE RISKS FOR STEP-UP RATE CALLABLE AGENCY SECURITIES
These agency securities present unique risks related to the call features. Callable investments pay interest until called. The issuer can choose to make the call decision at any call date after the initial non-call period for any reason. Investors should be aware of the timing of each call date and the other terms of the security. The risk is that the interest rate payable by the security at any time may be above prevailing market rates. If the rate is above the market and the investment is callable, the underlying security becomes subject to Call Risk since the issuer is motivated to replace the issue with less costly funds. Reinvestment Risk arises when investments are called, causing investors to relinquish a high rate and replace it with a lower, current market rate.
These agency securities also present unique risks related to the step-up features. Step-up securities will pay an initial rate of interest for a definite period and then “step-up” to a new, higher rate. Step-up investments have multiple rate steps at predetermined intervals. Investors should be aware of the timing and interest rates of all steps. The risk is that the stepped-up rate may be above prevailing market rates. If the rate is above the market and the investment is callable, the underlying security becomes subject to the same Call Risk since the issuer is motivated to replace the issue with less costly funds. The initial rate from the first step is not the yield to maturity (YTM). The YTM on a step-up investment is always higher and will depend upon when the security is redeemed and how many steps are actually utilized.
Some agency securities from the Federal Home Loan Bank are not transferable in units less than $100,000 to another broker dealer outside the complex operated by National Financial Securities (NFS). FISN can sell these securities in smaller units to its customers. These securities can be easily held in FISN accounts but will need to be sold within the NFS complex of broker dealers if the customer is moving their holdings to another broker dealer outside this complex of hundreds of firms. FISN can facilitate such a sale.
MARKET RISK
All investments held in a securities account are subject to market risk. Market risk is always present but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. This risk arises from the valuation that potential buyers in the market put on an investment that could be offered for sale. The potential risk is that the value may fall and transaction cost may be incurred if the item is put up for sale. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. It is possible that the value could rise as well and then it would be a market value gain. Market risk is an overall risk caused many factors such as interest rate movements, transaction cost and availability of purchasers.
INTEREST RATE RISK
All investments that pay interest or dividends are subject to interest rate risk. CD Alternative Investments sold by FISN are included since their primary purpose is to produce income in the form of interest. Interest rate risk is present if interest rates are moving up from their original level but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. The rule is simple: if rates rise, the “market” value will fall. All purchasers in the secondary market demand the yield on previously issued investments be increased to current levels before they buy them. Yields are increased by reducing the price. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Of course, the value may rise if interest rates fall and then it would be a market value gain if sold.
SECONDARY MARKET AVAILABILITY RISK
All investments are subject to the availability of a secondary market. Income producing investments including CD Alternative Investments sold by FISN are included since they don’t trade such as stocks do on an established “stock market”. The risk is the availability of such an organized and active place to sell your investment. This risk is present if you plan to sell your investment but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. FISN, though not obligated to do so, may maintain a secondary market in these investments after any initial distribution. Simply stated - buyers are needed to sell something. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager.
CALL RISK
Callable investments including callable CD Alternative Investments sold by FISN are subject to call risk. Investors should clearly understand all call provisions. This risk is present even if you plan to hold your investments until maturity. The issuer can “call” or redeem a security on certain call dates prior to maturity. The issuer calls the entire issue regardless of the holder. When called, the issuer returns the full amount with interest up to the call date. Only the issuer can exercise a call, not the account holder or the broker. Issuers usually call a security when rates have fallen and they can replace the funds at a lower rate. The risk is that, even though you get back your full investment, when you go to reinvest your funds, it will earn a lower rate. Calls cannot be predicted even though issuers consider only their own needs and costs. Call risk is difficult to evaluate for monthly statements. It is better estimated by requesting your FISN Investment Manager to seek out potential buyers for the actual investment position.
RE-INVESTMENT RISK
All fixed income investments are subject to re-investment risk. This risk is related to what you do when an investment ends, regardless of the reason. If you plan to continue investing, you have to re-enter the marketplace to find a new, replacement investment. One side of this “risk” is that rates may be lower and/or less product is available. The other side of this “risk” is that rates may be higher and/or more product is available. Strategies to lessen this risk are to time investment maturities close to when you might need the money or to go long when rates appear high and to go short term when rates appear low. Some investors do both by laddering the maturities between long and short terms. Long term maturities capture higher returns paid for longer investments. Shorter maturities keep the remainder of your funds regularly available so rate swings are not missed.
PRINCIPAL RISK
All investments are subject to principal risk. This risk is connected to the issuer. If the financial outlook of issuer declines, the issuer’s credit rating could be downgraded or the issuer could actually default on its debt. With most debt, if the issuer is less creditworthy, the debt will fall in value. And, if the issuer cannot repay the debt at all, the investment may be near worthless. The principal value will diminish in either case.
OVERVIEW
Fixed income securities are less liquid than trading investments such as stocks. All fixed income securities, including those with rates that step-up, are designed to be held long term, or to maturity, rather than being bought and sold, over and over again. Investors can reclaim their funds by exiting a security through a variety of methods. Although there are no early withdrawal rights, nearly every investment can be sold in an active market and some have a payment at death feature.
EARLY WITHDRAWAL
Fixed income securities, including those with rates that step-up, held in a brokerage account do not have early withdrawal rights for any reason, like some certificates of deposit.
INVESTMENT SALE
Securities purchased through FISN can be sold in the secondary market for fixed income investments. This market is an “over the counter” market which is actually conducted over the telephone between brokerage firms. There is no mechanism such as the New York Stock Exchange where orders can be entered and a sale is guaranteed. The availability of this secondary market cannot be guaranteed. And, there may not be buyers willing to pay an acceptable price if a security is put up for sale. Also impacting the price is that any investment posted for sale will compete with other fixed income investments being offered at the same time. To start the sale process, the investor has to offer their investment for sale to their broker. The broker will consider whether the brokerage firm wants to hold the security in its own inventory for resale at a later time or to sell it to another brokerage firm on the “street”. The broker will offer a net price to the investor for each security. The FISN broker and other “middle men” will build into their prices a trading incentive to cover their cost and profit objectives. The investor can accept the price or continue to hold the security. There is no assurance how high the “bid” price will be or that this price will be close to estimated prices shown online or printed on recent statements. Prices are simply reflections of the market and business objectives of participating firms.
TRANSFERABILITY
Most securities can be transferred amongst brokerage firms. The receiving firm generally requests the delivering firm to transfer cash and securities between accounts registered in the same ownership capacity. All debits and fees need to be paid prior to a transfer. Every firm has a process including minimums, fees and forms. It is not typical for certificates to be issued and sent to owners of record. Holding certificates outside the brokerage community reduces liquidity, prolongs an ownership transfer and lengthens the time for any sale.
Some agency securities from the Federal Home Loan Bank are not transferable in units less than $100,000 to another broker dealer outside the complex operated by National Financial Services (NFS). FISN can sell these securities in smaller units to its customers. These securities can be easily held in FISN accounts but will need to be sold within the NFS complex of broker dealers if the customer is moving their holdings to another broker dealer outside this complex of hundreds of firms. FISN can facilitate such a sale.
PAYABLE ON DEATH
Some securities have a feature that permits the investment to be paid off following the death of an owner. The standard privileges for refunding apply if the investment is owned by a single person or by a joint account of individuals. Other ownership forms used by individuals may require investigation to determine whether they fit the circumstances necessary for payment on death. Each issuer has its own program of rules and limits since there are no government rules or standards. If applicable, the issuer usually requires a death certificate and a standard form indicating the authority of a living individual to request the payment following death for the deceased person. FISN can assist survivors or estate officials in this process. The return of funds is not immediate and can take several weeks once all the paper work is submitted. The funds are simply returned to the brokerage account. The full amount is returned with interest up to the date of termination.
Non Callable
Term
Possible
Term
Step-Up
Periods
Step-Up
Rates
State
Tax
Free
Minimum
Investment
Interest
Payment
Buy
6.0 Mos
15.0 Yrs
Yr 1-5 Yr 6-10 Yr 11 Yr 12 Yr 13 Yr 14 Yr 15 Average
OVERVIEW
Fixed Rate Non Callable Corporate Securities are fixed income notes with protection against calls purchased at FISN, a brokerage firm. FISN searches nationwide in the secondary market for Non Callable Corporate notes with the highest return and offers these securities for investment. Non-investment grade notes pay a higher return than investment grade issues. FISN looks at notes that are widely traded, thus liquid. Since they are not callable there is no risk of calls taking away a high rate when market interest rates fall. Brokerage firms team-up to distribute these investments across the nation. FISN has access to the widest inventory from major Wall Street firms. Investors select corporate securities that meet their needs for yield and return of principal. Caution is warranted when investing in non-investment grade securities. The security is held in a brokerage account.
PROCESS
Investors start by selecting suitable Fixed Rate Non Callable Corporate Securities for investment and then open a standard brokerage account at FISN in their name. These securities are not new issues. They are investments outstanding in the secondary market and are rated below investment grade. A brokerage account can hold many corporate securities from any corporate issuer but caution is warranted when investing in non-investment grade bonds. The investor wires funds or sends a check to fund this new account. FISN sends new account paperwork and purchase confirmations to the investor. The brokerage forms are completed and the transaction confirmation is verified. Only one account needs to be opened for each ownership category. Paperwork is returned to FISN along with the required identification.
CREDIT QUALITY Issuers of Fixed Rate Non Callable Corporate Securities listed here carry a rating below Investment Grade. A credit rating is the measurement of the financial strength of a bond issuer. This measurement helps an investor to understand an issuer’s ability to make timely interest payments and repay the investment principal upon maturity. Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies. Caution is warranted when investing in non-investment grade bonds in which risk is more inherent. The notes are not bank deposits and are not FDIC insured. Principal is protected at maturity by the issuer.
The following is an explanation of the top credit ratings. The rating for each individual investment should be evaluated based the rating criteria. Credit ratings fluctuate with business conditions. Upgrades and downgrades in credit ratings change the risk profile of issuers and possibility the market prices of their securities.
Long Term Credit Ratings
Investment Grade AAA ratings denote the highest rating assigned. This rating is assigned to the "best" credit risk relative to all other issuers or issues.
AA ratings denote a very strong credit risk relative to other issuers or issues. The credit risk inherent in these financial commitments differs only slightly from the highest rated issuers or issues.
A ratings denote a strong credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions may affect the capacity for timely repayment of these financial commitments to a greater degree than for financial commitments denoted by a higher rated category.
BBB ratings denote an adequate credit risk relative to other issuers or issues. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment of these financial commitments than for financial commitments denoted by a higher rated category.
Below Investment Grade BB ratings denote a fairly weak credit risk relative to other issuers or issues. The payment of the financial commitments is uncertain to some degree and capacity for timely repayment remains more vulnerable to adverse economic change over time.
B ratings denote a significantly weak credit risk relative to other issuers or issues in the country. Financial commitments are currently being met but a limited margin of safety remains and capacity for continued timely payments is contingent upon a sustained, favorable business and economic environment.
See Corporate Bond Ratings chart for a simple description and comparison of credit quality ratings issued by S&P, Moody’s and Fitch.
INVESTMENT FEATURES
Fixed Rate, Non Callable corporate securities are unsecured and un-subordinated obligations of the corporate issuer. Non-investment grade notes offer higher yield opportunities compared to investment grade and other higher credit quality investments such as FDIC insured CDs. The issuers are major U. S. corporations and are not FDIC insured, like banks. The notes are not callable nor are they new issues. The notes are purchased in the secondary market and accrued interest needs to be paid to the seller, in addition to the discount or premium price. The yield to maturity (YTM) is based upon the price, accrued interest paid, coupon payments and remaining time to maturity. They pay interest at a fixed rate over the life of the investment. The interest is paid on a semi-annual basis into the brokerage account where it can continue to earn interest in a money market fund account. Key information is the name of the issuer, the issuer credit quality, sale price, accrued interest due, YTM and the maturity date. There is no early withdrawal permitted but the note can be resold in the secondary market. Securities sold prior to maturity are subject to market conditions and could result in a loss. Most of these bonds and notes do not have a payable on death provision. Non-investment grade debt requires extra caution.
Interest can be disbursed immediately or periodically via checks or electronic funds transmission straight to your local bank. Available cash also can be withdrawn from the account via checks, automatic teller machines or debit cards. There may be fees for accounts with ATM or debit cards.
ID REQUIREMENTS
Brokerage accounts are opened at FISN’s brokerage division, First Internet Securities Network. Securities in FISN accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company. FISN is required under U.S. government rules to verify ownership of all accounts. Individuals are required to provide a copy of a government-issued photo identification. Business accounts, trusts and other non-individual accounts have special documentation requirements.
FEES
There are no investment fees or commissions paid by the investor. Most investments require a minimum purchase amount. Secondary market securities are sold net to the investor without any commissions and are usually offered at a market price indicating a discount or premium to par.
The above disclosure is typical for this type of issue. Actual disclosures are published for each new issue in most cases. Look for the related disclosure for each deal on the FISN web site or ask your FISN Registered Representative to send it to you. Current disclosures are made available to purchasers for new issues either by mail or online after the trade date or settlement date. Disclosures for secondary issues were publish at the time of the original settlement and may not be available or up-to-date.
UNIQUE RISKS FOR FIXED RATE, NON CALLABLE & NON INVESTMENT GRADE CORPORATE SECURITIES
These fixed rate securities present unique risks related to their credit quality. They are below investment grade by definition. All types of risk are present and can impact value and liquidity. The rating agencies and the market have signaled that the caution is warranted and close supervision is necessary.
MARKET RISK
All investments held in a securities account are subject to market risk. Market risk is always present but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. This risk arises from the valuation that potential buyers in the market put on an investment that could be offered for sale. The potential risk is that the value may fall and transaction cost may be incurred if the item is put up for sale. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. It is possible that the value could rise as well and then it would be a market value gain. Market risk is an overall risk caused many factors such as interest rate movements, transaction cost and availability of purchasers.
INTEREST RATE RISK
All investments that pay interest or dividends are subject to interest rate risk. CD Alternative Investments sold by FISN are included since their primary purpose is to produce income in the form of interest. Interest rate risk is present if interest rates are moving up from their original level but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. The rule is simple: if rates rise, the “market” value will fall. All purchasers in the secondary market demand the yield on previously issued investments be increased to current levels before they buy them. Yields are increased by reducing the price. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Of course, the value may rise if interest rates fall and then it would be a market value gain if sold.
SECONDARY MARKET AVAILABILITY RISK
All investments are subject to the availability of a secondary market. Income producing investments including CD Alternative Investments sold by FISN are included since they don’t trade such as stocks do on an established “stock market”. The risk is the availability of such an organized and active place to sell your investment. This risk is present if you plan to sell your investment but has no effect if investments are held to maturity. Most investments are purchased with the intention of holding them to maturity. FISN, though not obligated to do so, may maintain a secondary market in these investments. Simply stated - buyers are needed to sell something. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager.
CALL RISK
These investments are typically not callable.
RE-INVESTMENT RISK
All fixed income investments are subject to re-investment risk. This risk is related to what you do when an investment ends, regardless of the reason. If you plan to continue investing, you have to re-enter the marketplace to find a new, replacement investment. One side of this “risk” is that rates may be lower and/or less product is available. The other side of this “risk” is that rates may be higher and/or more product is available. Strategies to lessen this risk are to time investment maturities close to when you might need the money or to go long when rates appear high and to go short term when rates appear low. Some investors do both by laddering the maturities between long and short terms. Long term maturities capture higher returns paid for longer investments. Shorter maturities keep the remainder of your funds regularly available so rate swings are not missed.
PRINCIPAL RISK
All investments are subject to principal risk. This risk is connected to the issuer. If the financial outlook of issuer declines, the issuer’s credit rating could be downgraded or the issuer could actually default on its debt. With most debt, if the issuer is less creditworthy, the debt will fall in value. And, if the issuer cannot repay the debt at all, the investment may be near worthless. The principal value will diminish in either case.
OVERVIEW
Fixed income securities are less liquid than trading investments such as stocks. Fixed income securities are designed to be held long term, or to maturity, rather than being bought and sold, over and over again. Although there are no early withdrawal rights, nearly every investment can be sold in an active market.
EARLY WITHDRAWAL
Fixed income securities held in a brokerage account do not have early withdrawal rights for any reason, like some certificates of deposit.
INVESTMENT SALE
Securities purchased through FISN can be sold in the secondary market for fixed income investments. This market is an “over the counter” market which is actually conducted over the telephone between brokerage firms. There is no mechanism such as the New York Stock Exchange where orders can be entered and a sale is guaranteed. The availability of this secondary market cannot be guaranteed. And, there may not be buyers willing to pay an acceptable price if a security is put up for sale. Also impacting the price is that any investment posted for sale will compete with other fixed income investments being offered at the same time. To start the sale process, the investor has to offer their investment for sale to their broker. The broker will consider whether the brokerage firm wants to hold the security in its own inventory for resale at a later time or to sell it to another brokerage firm on the “street”. The broker will offer a net price to the investor for each security. The FISN broker and other “middle men” will build into their prices a trading incentive to cover their cost and profit objectives. The investor can accept the price or continue to hold the security. There is no assurance how high the “bid” price will be or that this price will be close to estimated prices shown online or printed on recent statements. Prices are simply reflections of the market and business objectives of participating firms.
TRANSFERABILITY
Most securities can be transferred amongst brokerage firms. The receiving firm generally requests the delivering firm to transfer cash and securities between accounts registered in the same ownership capacity. All debits and fees need to be paid prior to a transfer. Every firm has a process including minimums, fees and forms. It is not typical for certificates to be issued and sent to owners of record. Holding certificates outside the brokerage community reduces liquidity, prolongs an ownership transfer and lengthens the time for any sale.
PAYABLE ON DEATH
Some securities have a feature that permits the investment to be paid off following the death of an owner. Fixed rate, corporate securities typically don’t have this feature although there are some exceptions. Ask you FISN Investment Manager whether the bond you are interested in has any "payable on death" provisions.
