Interest Rate Securities
Debt securities traded on the ASX are also called Interest Rate Securities (IRS). With IRS, capital is raised by an entity (corporate or government) to assist in the running of their operations. There are three types:
IRS provide all the benefits of fixed interest investing, however they are not without risk:
- Credit risk. The risk that the issuer may not be able to pay its obligations (distributions or capital) at the due date. Generally the higher the credit quality of the issuer, the lower the risk and the yield associated with the security, and visa versa.
- Market price volatility. Like company shares, the market price of IRS may fall below the price the investor originally paid, especially if the company suspends or defers interest payments, or if its performance or prospects decline.
- Interest rate risk. A fixed interest rate security will typically depreciate in value in a rising interest rate environment (and appreciate in value if interest rates fall).
- Liquidity risk. The risk you may not be able to sell your securities on the ASX when you want, at the price you want, as there may not be sufficient buyers.
- Long timeframes. The longer the term the greater the exposure to risk that market conditions or the issuer’s credit quality might change.
- Ranking. Ranking refers to the order in which liabilities will be paid should the issuer be wound up. The higher the ranking of a security the safer the investment.