What Are InterNotes®?

InterNotes® is a product sold by the investment banking firm, Incapital LLC. Its purpose is to make corporate debt securities more accessible to retail investors, by allowing investments in $1,000 increments. The company was founded by Thomas S. Ricketts in 1999 with a mission to offer investors access to new corporate bonds issued by companies in a wide variety of sectors including the financial services, telecommunications, and automotive industries.

Key Takeaways

  • InterNotes® is a platform for purchasing corporate bonds.
  • It is marketed to retail investors and emphasizes ease of use.
  • InterNotes® includes convenience-oriented features such as small upfront investment sizes, diverse maturity periods and interest payment schedules, and a “survivor’s option” to help with estate planning.

Understanding InterNotes®

The concept behind InterNotes® is to allow smaller investors to conveniently access the corporate bond market. Many corporate bonds can be purchased through the InterNotes® platform, which is sold through a variety of broker-dealer financial firms. The bonds sold through InterNotes® are priced without any premiums or discounts, and no accrued interest is paid at the time of purchase.

When deciding which bonds to purchase, investors using the InterNotes® platform can select from different maturities, coupon rates, and interest payment schedules. The maturities offered through InterNotes® range from 1 year to 30 years to allow flexibility in laddering fixed income investments by term to meet specific investor needs. New InterNotes® are offered for five business days at the same interest rate so investors can research potential bond purchases with no pressure to make a quick decision.

Some InterNotes® are callable, meaning the issuer can redeem them before maturity. Callable bonds are often redeemed when interest rates fall. Calling forces the investor to go into the marketplace to reinvest and they may find other securities offering similar profit terms.

Real World Example of InterNotes®

InterNotes® carry the same type of market risk of any other corporate bond, which is not often readily sold on secondary markets and will tend to fall in price as interest rates rise. They are also subject to credit risk in the event an issuer defaults on its debt obligations.

One estate planning feature included in most InterNotes® is a survivor’s option. With a survivor's option, on the death of an investor the individual’s estate may redeem the securities before maturity at par value. This provision provides more flexibility in passing along wealth to heirs, although there are limitations on the bond's holding time before exercising this option. Also, each issuer may limit the dollar value of bonds which can be redeemed early. These limitations provide an incentive for investors to diversify their holdings across multiple issuers.