What is a 'Retail Note'

A retail note is a medium-term, subordinated, unsecured debt obligation usually issued by a multinational corporation. Retail notes can be purchased directly from the issuer at par in $1,000 increments with no accrued interest or added markups. 

These notes will usually pay a fixed interest rate for nine months or more. After that date, the interest rate may vary. Most retail notes also feature a survivor's option. They are also known as retail bonds.

Breaking Down 'Retail Note'

Retail notes are fixed-rate obligations of the issuing company. The notes and any accompanying interest payments are backed by the full faith and credit of the issuer and are either callable or non-callable. Callable retail notes usually produce higher yields, and some may include call protection for a set period.

However, due to the subordinate nature of these investments, they may not work for every portfolio. Subordinated debt is a loan or security that ranks below other loans or securities with regard to claims on assets or earnings. Subordinated debt is also known as a junior security or subordinated loan. 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.

Many issuers include top international corporations that offer notes weekly. The information contained in the offerings typically comprises maturities, interest-payment periods, call dates, credit ratings and coupon rates, but issuers retain the right to change or cancel an offer without notice. Offerings are valid for one week.

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. Fixed payments may be monthly, quarterly or semi-annually and will continue until maturity. If the notes are callable, the payments will continue until they are called away.

  • Retail notes may qualify for tax-deferred status on their own. They can be kept in fully taxable accounts or invested in an individual retirement account (IRA), where interest income is tax-deferred.
  • There is a secondary market for retail notes, but they are meant to be held until maturity. The market value of a retail note will fluctuate until the maturity date.
  • The survivor's option on these notes allows the holder's estate to return the note to the issuer at par value. If a note should survive its original owner, their heirs may still deliver the note at maturity for par value.

Comparing Retail Notes and Bonds

A bond is also a fixed income investment in which an investor loans money to an entity. The issuing company borrows funds through the note offering for a defined period at a variable or fixed interest rate. When companies need to raise money for new projects, to maintain ongoing operations, or to refinance existing debts, they may issue bonds directly to investors instead of obtaining a bank loan. 

The responsible entity issues a bond that contractually states the interest rate to be paid and the time at which the loaned funds, or the principal, is returned. The interest rate, called the coupon rate or payment, is the return that bondholders earn for lending their funds to the issuer.

Bonds are more complicated than retail notes in part because their price is subject to factors such as credit ratings and interest rates. The cost of a bond will move inversely to interest rates.

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