Smart Bond Investing—Money Market Securities and More

Asset-Backed and Preferred Securities

 

Asset-Backed Securities

 

Asset-backed securities (ABSs) are certificates that represent an interest in a pool of assets such as credit card receivables, auto loans and leases, home equity loans, and even the future royalties of a musician (for instance, Bowie bonds). Once you get beyond mortgage-backed securities, which are a type of asset-backed security, investing and trading in the asset-backed market is almost exclusively done by more sophisticated investors. The interest and principal payments on the pool of assets are passed through to investors in the form of short-term bonds that generally carry an investment-grade credit rating, and these bonds are relatively liquid.

 

Preferred Securities

 

There are two common types of preferred securities: equity preferred stock and debt preferred stock. Equity preferred stock is much like common stock in that it never matures, and it declares dividends rather than awarding regular interest payments. Debt preferreds, on the other hand, pay interest like traditional bonds, and since they are corporate debt, they stand ahead of equity preferred securities in the payout hierarchy should the company default. However, many preferreds are hybrids—they contain a combination of debt and equity features, and it is not always clear which type of security they are. Unlike traditional bonds, preferreds generally have a par value of $25 instead of the traditional $1,000. They also tend to pay interest quarterly, rather than the traditional semiannual payment associated with most bonds. Most preferreds are listed just like stocks, with the majority trading on the New York Stock Exchange. Like traditional bonds, preferreds tend to have credit ratings, and upgrades and downgrades often play an important role in the price a preferred can command in the secondary market.

 

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