Coupon or distribution rate

"The nominal interest rate a hybrid security pay (i.e. annual income divided by the face value of the security)." 1

The terms of bank hybrid securities usually contain a formula similar to the following for the coupon or distribution rate (assuming the bank hybrid securities include franking credits):

Distribution Rate = (Market Rate + Margin) x (1 - Tax Rate)

For example, if the Market Rate is 2.00%, the Margin is 4.00% and the Tax Rate is 30%, then the Distribution Rate is 4.20%. This means that, if the face value is $100 then:

  • You should receive cash distributions totalling 4.20% per annum (subject to payment conditions) and should receive attached franking credits with a value of 1.80% per annum (subject to payment conditions). This is calculated as (Market Rate + Margin) x Tax Rate.

If you purchased the bank hybrid securities through a public offer for $100, or subsequently in the secondary market for $100, then you will receive a total value of 6.00% per annum (4.20% plus 1.80%).

If you purchased the bank hybrid securities for more or less than $100, then another return measure may be more appropriate for you to consider.

Running yield

"A measure of the return on a hybrid security based on the annual coupon payments expressed as a percentage of its current market price. It takes no account of any future capital gain or loss on the security". 1

This is particularly relevant if you are considering purchasing bank hybrid securities for a market price which is more or less than the face value. It is usually calculated according to the formula (assuming the bank hybrid securities include franking credits):

Running yield = (Distribution Rate + Franking Credit Rate) / Market price

For example, if the Distribution Rate is 4.20%, the franking credit rate is 1.80% and the current market price is $95, then the running yield is 6.32%. However, if the Distribution Rate is 4.20%, the franking credit rate is 1.80% and the current market price is $105, then the running yield is 5.71%.

Yield to first call2

"The average annual return an investor should receive if they buy a hybrid security for its current market value and hold the hybrid security to maturity. The calculation factors in coupon payments, the time to and amount due at maturity, and the capital gain or loss that will be made on maturity. It also assumes that the coupon payments are reinvested in the hybrid security." 1

Yields to maturity can be calculated for different dates. A common calculation is for the date of the first call (issuer redemption date). The yield to first call is particularly relevant if you are considering purchasing bank hybrid securities for a market price which is more or less than the face value, and you want to compare them against other securities which pay distributions at different times or have a different face value.

For example, if the yield to first call is 6.00%, this means that the average return you will receive is 6.00% if you hold the bank hybrid security to the first call date, regardless of subsequent changes in the market price.

Footnotes

ASX Limited, Understanding Hybrid Securities, April 2014.

The yield to first call is also commonly referred to in the market as “yield to maturity”. Banks typically redeem hybrid securities at the first call date. However, there have and may be times where banks have not decided to redeem hybrid securities due to various factors including regulatory and commercial reasons.

The information in this module is not investment advice and has been prepared without taking into account your investment objectives, financial situation or particular needs (including financial and taxation issues). If you have any questions, you should seek advice from your financial adviser or other professional adviser.