Invest In Medium Term Notes
April 24, 2009 by Derek Powell
Filed under Stock Exchange
Organizations that want a constant cash flow capital, for operations or debt financing, often turn to medium-term notes. These notes were introduced in the 70s for automobile finance companies that have since been regulated by the SEC, under rule 415.
If you want to compare the rates of fixed income securities, one of the benefits of medium-term notes is the ability to compare the rate schedule and maturity dates. This helps when it comes to choosing the correct investment vehicle.
Medium term notes are a way to invest your money for a specified time, usually between one and 10 years. Typically, the interest rate on these investment vehicles is higher than shorter term notes. The length of time is appealing to those looking to invest their money and obtain high yields without a long-term commitment.
Medium-term notes are sold through brokers or dealers, not traded on a stock or commodity exchange. The dealers set rates based on current market conditions, investors deal directly with the dealer. Remember that the dealer can call these notes before they mature.
There are several interest rate options available for medium-term notes, including floating, inverse floating, fixed and step up or step down rates. Structured notes are available with rates which are based on the prime rate, equity index or alternative options. The interest payments are flexible, and you have options ranging from monthly to semi-annually.
Medium term notes offer a compromise between short-term investing and long-term stock or bond investments. However, they are unsecured. They are generally backed by the strength of the issuer, which could be any type of entity, including a city, country, or financial institution. As an example, a city might sell these types of notes to finance a construction project. If the entity is unable to pay or goes bankrupt, your investment could be worthless. But overall, MTNs are not considered high risk.
Medium term notes share similar characteristics as bonds, but are sold in smaller amounts on a more continuous basis. There are also exchange traded notes that are similar to stocks and are even traded on the stock market. This allows for investors to take advantage of current market conditions. For diversification purposes, investors can choose to have several different types of MLNs in their portfolio and complement them with shorter investment vehicles and a mix of stocks and bonds.
Be sure to read the general prospectus to fully understand rates and maturity before investing in medium-term notes. Whilst there is flexibility to request different rates or structure, this generally results in a lower yield to cover the paperwork costs.
