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Also known as retail bonds, retail notes are a type of investment option that are somewhat similar to a traditional bond issue. Classed as a fixed-income security, a retail note typically provides a fixed rate of interest on the value of the note for a specified period of time. Notes of this type may also include provisions for a variable rate of interest later in the life of the investment. Considered a safe option, this approach can allow an investor to generate some return while also taking advantage of the ability to enjoy a tax break.
Unlike other types of investments, it is common to purchase a retail note directly from the issuer. While there are exceptions, the value of the notes is based on the number of units purchased by the investor. Most retail note arrangements allow purchase in increments of $1,000 US dollars, with some limitations on how many increments may be purchased by a single investor. The terms are very similar to bond issues, and will usually include a fixed rate of interest for at least the first several months of the note. Notes that are structured to remain in place for more than one calendar year usually allow the issuer to change from a fixed rate to a variable rate later in the contract.
Like a traditional bond, it is possible for the issuer to call a retail note before the maturity date. The terms of the note will normally specify what type of events or conditions must exist before the issuer can take this type of action. When this occurs, the investor will receive the principal paid for the note, plus any interest that has accrued since the issue of the last interest payment. In some cases, the investor may have the opportunity to roll the principal and interest into the purchase of a new retail note that the issuer is preparing.
Depending on the structure of the retail note, it may be possible to defer taxes due on the dividends until the note is called or reaches maturity. Since trade and tax regulations vary somewhat from one country to the next, consulting a tax professional will make it possible to identify what exemptions may be in place and how to go about claiming them. In some instances, it may be possible to defer the taxes by having the dividends deposited directly into an Individual Retirement Account (IRA) or Individual Savings Account (ISA), with taxes not being due until those funds are disbursed from the IRA or the ISA.
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