Royalty Income Trust

AAA

DEFINITION of 'Royalty Income Trust'

A type of special-purpose financing created to hold investments or their cash flows in operating companies. These trusts are neither stocks nor bonds but investment trusts (a legal entity). Royalty trusts buy the right to royalties on the production and sale of a natural resource company and pass on the profits to trust unit holders.

INVESTOPEDIA EXPLAINS 'Royalty Income Trust'

Royalty trusts are attractive to investors because they promise high yields compared to stocks and bonds. They are attractive to companies wishing to sell cash-flow producing assets because they provide a much higher sale price than what is possible with conventional financings.

For example, suppose that ABC oil company has maturing oil wells with well-known rates of production and reserves. The company estimates that it will produce and sell one million barrels per year for the next 20 years at a price of $20 per barrel (thus $20 million per year). ABC wants to sell the wells, but an investment bank suggests that ABC use a royalty trust, so ABC sells all the oil wells to a trust, the XYZ Royalty Fund. ABC receives a payout from the investment bank and will still manage the company for a fee.

RELATED TERMS
  1. Specified Investment Flow-Through ...

    A type of income trust that holds publicly traded investments, ...
  2. Canadian Royalty Trust - CANROY

    An oil, gas or mineral company that is organized as a trust rather ...
  3. Royalty

    A payment to an owner for the use of property, especially patents, ...
  4. Special Purpose Vehicle/Entity ...

    1. Also referred to as a "bankruptcy-remote entity" whose operations ...
  5. Equity Unit Investment Trust

    A registered trust in which investors purchase units from a fixed ...
  6. Asset-Backed Security - ABS

    A financial security backed by a loan, lease or receivables against ...
Related Articles
  1. Oil: A Big Investment With Big Tax Breaks
    Investing Basics

    Oil: A Big Investment With Big Tax Breaks

  2. Income Funds 101
    Mutual Funds & ETFs

    Income Funds 101

  3. An Introduction To Canadian Income Trusts
    Options & Futures

    An Introduction To Canadian Income Trusts

  4. Getting A Grip On The Cost Of Gas
    Home & Auto

    Getting A Grip On The Cost Of Gas

comments powered by Disqus
Hot Definitions
  1. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific ...
  2. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  3. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  4. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
Trading Center