Retail Note

Retail Note

Investopedia / Zoe Hansen

What Is a Retail Note?

A retail note is a debt obligation issued by a corporation. They can be purchased directly from the issuer at par in $1,000 increments, like bonds, but with no accrued interest or added markups. They are subordinated and unsecured debt and are often an attractive option compared with bonds.

Key Takeaways

  • Retail notes are debt obligations issued by corporations that come with no accrued interest or added markups.
  • Investors of retail notes receive fixed interest payments until the notes mature or are called away.
  • Retail notes are seen as a simpler way to receive fixed-income payments when compared to bonds.
  • Retail notes usually come with a yield premium due to an embedded callable feature.
  • A survivor option is a common feature of retail notes, allowing the beneficiaries of the note to sell it back to the issuer at par.

Understanding a Retail Note

Retail notes are issued by corporations and pay the investor fixed payments for the note's duration. Like bonds, retail notes can be either callable or non-callable. The majority of retail notes, however, are callable.

Callable securities are those that can be called away by the issuer before maturity. Because of this possible loss of income for the investor, a callable retail note will pay a premium. This added yield premium makes retail notes more attractive than regular bonds, particularly for investors who are not concerned with a loss of income when a retail note is called. Many callable securities also come with call protection for a certain period of time.

Another attractive feature of retail notes is the survivor option that they come with. When the original owner of the retail note passes away, the survivor option permits the beneficiaries of the retail note to sell the note back to the issuer at par.

Retail notes are issued weekly, making them readily available investments. In a retail note offering, the standard debt obligation information is provided, such as maturities, interest-payment periods, and credit ratings.

Retail notes may be purchased either directly from the issuer or through a financial intermediary, such as a broker. After buying the notes, the purchaser receives regular fixed-interest payments until maturity. If the notes are callable, the payments will continue until they are called away.

Retail Notes as an Investment

Due to the subordinate nature of retail notes, they may not work for every investor. Subordinated debt is a loan or security that ranks below other loans or securities with regard to claims on assets or earnings. In the case of borrower default, creditors who own subordinated debt won't be paid out until after senior debt holders are paid in full.

This ranking of retail notes, therefore, makes it a riskier investment than senior debt. However, the creditworthiness of the issuer of the retail note is a large factor in a note's riskiness.

For example, a financially healthy company such as Apple (AAPL) would have an extremely low chance of defaulting on its debt. Therefore, the subordinated retail notes would not carry many risks. Conversely, a company with poor financial health would have significantly different risk profiles for its senior debt and subordinated debt.

Rating agencies such as Standard & Poor's and Moody's analyze companies and their ability to pay their debt, assigning them with ratings that reflect their risk profile. Bonds, in general, always rank below senior debt.

Retail Notes vs. Bonds

Stocks and bonds are the most common investments. Bonds can be a complicated investment as they have many moving parts, such as the price, the interest rate, the yield, markup costs, accrued interest, and lack of control regarding taxes and capital gains. Therefore, retail notes are often seen as a good alternative to bonds.

Retail notes are offered more often: weekly, as noted above. They also do not have the associated costs of markups and accrued interest and have beneficial tax profiles, such as the ability to include them in your individual retirement account (IRA). Once in your traditional IRA, the income received from interest payments will grow tax-deferred.

Article Sources
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  1. Internal Revenue Service. "Traditional IRAs." Accessed Dec. 6, 2021.