Notes are fixed income investments that have maturities of ten years or less. The issuers of notes range from the US government with the highest credit quality to an unsecured note with liquidation interests subordinated to every class of security except common stock. Corporations issue notes to fund working capital needs and the US government and agencies issue notes to balance budgets. Notes provide investment returns that are consistent with investment objectives of income with a moderate to conservative risk tolerance. For investors, notes represent an investment that can provide balance to the overall portfolio risk level and help meet intermediate term cash distributions. The different types of securities that are notes include:
- US Treasury Notes
- US Agency Notes
- Municipal Notes
- Corporate Senior Notes
- Corporate Subordinated Notes
Investor attraction for notes in their investment portfolios is founded in the investment characteristics which provide the ability to balance risk and return. Notes are generally not correlated with the returns of the overall stock market which improves the risk adjusted return for the entire portfolio.
US Treasury Notes have no default and liquidity risk but are only compensated for inflation. In contrast, a subordinated note could be greatly discounted from default risk, yet provide equity-like returns if the management team can turn around operational deficiencies. Based on an individual’s marginal tax rate, municipal notes can provide federal, state and local tax-free income. Municipal notes can provide greater after-tax income than taxable notes with same credit rating and duration.
A fee-based financial advisor can help determine the appropriate portion of your investment portfolio that should be invested in notes, and which type of notes based on your personalized investment policy statement designed to reach your True North.
