NABHA is a floating rate note issued by the National Australia Bank.  These securities have a face value of $100 and pay the BBSW plus 1.25%. Interest is paid quarterly on 15th of February, May, August and November.To be entitled to a payment, you must buy them on the ASX 15 days before the due date.

They were issued in June 1999 and are perpetual. They have an S&P rating of A. The Bank has the right to redeem the note for face value (plus accrued interest). You have no right to redemption. Interest is non-cumulative. These are trading at the time of writing at about $80.50, are just ex-dividend and are the most liquid of the floating rate notes with some thousands changing hands each day.

Given the BBSW is 4.75%, then they are paying 6% on the face value or about 7.5% on the price of the note. Given the current interest rates on offer from other banks, this note price is probably about what you would expect but there are certainly higher yields on offer. However, 18 months ago these notes were trading around their issue price of $100 which illustrates the risks involved in investing in these types of securities.

One thing to be aware of is that banks are regulated by APRA, and it is always concerned that ordinary depositors are protected. APRA considers that the more shareholder capital is present, then the more protected depositors are and it classifies this ‘at risk’ capital as Tier 1 and sets minimum levels for this. When the banks issue interest bearing securities, they are only classified as Tier 1 if they are unsecured and banks frequently set the terms and conditions on these securities precisely to meet APRA’s requirements. If there were serious problems with the bank, the notes would translate to a preference share and your security would rank behind all other creditors, but ahead of ordinary shareholders.

HLNG securities were issued in December 2010 by Healthscope, a private health care provider with annual revenues of about $2,000 million. The notes have a face value of $100 and pay fixed interest of 11.25%. They have security over the assets subordinated to $1.2 billion of senior debt but ahead of $1.5 billion of private unsecured debt.

They mature in June 2016 and will be repaid on that date unless the company floats on the stock exchange in the interim in which case investors have the right to be repaid by the issue of shares in the initial public offering at a 2.5% discount to other retail investors. Interest is paid quarterly on the 25th of March, June, September and December.

Although secured over the assets, these are formally unsecured. Interest is cumulative and, if payments are suspended, interest is earned at the fixed rate plus 2%. Events that may cause the suspension of payments are an inadequate debt service cover or a default on the senior debt. The issuer can redeem the notes at any point for the face value plus outstanding interest plus an additional amount which varies as time passes and whether the company has floated.

This is a highly indebted company and a high risk security evidenced by the yield on offer. If the level of debt proves too hard to manage, there are not a lot of assets left to secure these notes although having private investors ranked behind these might give some comfort.

ANZPA is a floating rate convertible preference share from another major bank. These were issued by ANZ at a face value of $100 in December 2009 and will be redeemed in December 2016. Each quarter they pay a dividend which is a mixture of cash and franking credits which, when grossed up, equals the BBSW plus a margin of 3.1%.

Again, these preference shares rank behind all other creditors except equally with a number of previous issues of preference shares and ahead of ordinary shares. They are rated A+ by S&P. Dividends are non-cumulative. Redemption is by converting them into the appropriate number of ANZ ordinary shares based on the volume weighted average price (VWAP) over the previous twenty days using a value of $101.01 but with a maximum number of shares based on approximately half the VWAP at the date when they were issued. If ANZ shares are trading at less than this value in December 2016, then the preference shares may be redeemed for cash or redemption will be deferred until a dividend date when the share price meets this condition.

A typical quarterly dividend might be calculated as follows: BBSW of 5.0217% plus the margin of 3.1% multiplied by (1- 30% tax rate). This dividend rate equates to a fully franked quarterly dividend of $1.4330 and that is what you receive. If you multiply this by 4, you get an annual rate of 5.732% not the ‘headline’ rate of BBSW + 3.1% which would be 8.1217%.

If you are on a very low tax rate such as a super fund in pension mode, you will get the franking credits refunded to you by the Tax Office after you submit that year’s tax return which might be quite a long delay.

PERLS V were issued by the Commonwealth at a face value of $200 in October 2009. While these are formally a perpetual instrument, they are expected to be redeemed in October 2014 at the election of the bank. Each quarter they pay a dividend which is a mixture of cash and franking credits which, when grossed up, equals the BBSW plus a margin of 3.4%. See the calculation for ANZPA to see how this works.

They are a stapled security, one part being an unsecured subordinate note issued by the bank’s New Zealand branch and the other being a preference share issued by the bank. Again, these preference shares rank behind all other creditors except equally with a number of previous issues of preference shares and ahead of ordinary shares. They are rated A+ by S&P. Dividends are non-cumulative.

Redemption is probably by converting them into the appropriate number of Commonwealth ordinary shares based on the volume weighted average price (VWAP) over the previous twenty days using a value of $202.02. There are a couple of conversion conditions, for example if CBA shares are trading at less than about half the value when the PERLS V were issued (approximately $22.72) in October 2014, then the preference shares may be redeemed for cash or redemption will be deferred until a dividend date when the share price meets this condition.

These securities tend to trade in a range from about $202 up to about $212 as the dividend date approaches. But, these still have equity style risk – falling to below $196 in one recent trading session at the time of writing.

DXRPA have a face value of $100 and pay a non-cumulative quarterly interest at BBSW plus 1.3%. Tax is 90% deferred, and if it’s not, an extra .5% is added. They may be redeemed on 1 July 2012 , if not the interest margin steps up by 2%. DEXUS has the option to redeem for cash or by exchanging for ordinary DEXUS securities at a 2% discount.

The tax deferral feature means that the Tax Office treats 90% of the payments as a return of capital and this reduces the cost basis of the security. So when you sell the security or it is redeemed, you then have a capital gain liability but this is potentially some years after the distribution.

Features such as franking credits being part of the distribution or tax deferral make a difference as to the yield you might expect from a security but have different implications depending on your individual tax situation.

Interest rate step ups are a common feature as are maximum limits on the number of shares that may be used to redeem the security.