Fixed Rate Capital Securities provide increased risks and therefore, provide yields greater than corporate bonds and preferred stocks of the same institution to compensate for the risk. These risks originate from the fact that Fixed Rate Capital Securities come lower in hierarchy of capital structure compared to senior debt, since the borrowing instution can defer payments on interests. Income from Fixed Rate Capital Securities is fulle taxable and can be structured as both equity and debt.
Fixed Rate Capital Securities are of 3 types based on whether or not the parent issuing institution issues the securities directly or an intermediate vehicle –
1. Junior debentures which are directly issued by a parent company
2. Trust preferred securities which are issued by a trust established by the issuer parent
3. Partnership preferred securities that are granted by a LLC – Limited Liability Company organized by the parent company.