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Asset backed security

An asset backed security, or trust preferred stock, is a new class of bonds.

Expanded Definition

They are listed and traded on major stock exchanges as preferred stocks. Each issue is backed by a single corporate bond. Hence, these are, in effect, corporate bonds traded on major stock exchanges and available at discount broker commissions.

Because most corporate bonds are traded over the counter, and prices are not published and bid/ask spreads are thought to be wide, most individual investors cannot trade bonds. They must buy bonds and plan to hold them to maturity,selling them only in an emergiency due to high trading costs. Trust preferred stocks remove these disavantages. They can be traded in lots as small as $10, prices are published, and quotes and charts are readily available.

The major disadvantage of trust preferred stocks is that they are usually quoted in the newspaper under the investment bank's listing (Lehmans, Merrill Lynch, Morgan Stanley) of preferred stocks, or under their company's tradename (Cabco, CBTCS, Corts, PPlus, Saturns, etc.) for third party trust preferred stocks. One must consult the prospectus to learn the details of the issue, and sometimes, the name of the corporation whose bond supports the issue. QuantumOnLine.com is the best source of this information. Their symbol look-up function will find most of the issues. Once you know the stock ticker, quotes can be obtained from the usual sources.

QuantumOnLine.com now offers a list of Third Party Trust Preferred stocks that include current bond rating, details of call dates, and a link to the original prospectus. [1] They are available from a wide range of corporations and in a full range of bond ratings. Most are long bonds, but increasingly shorter maturities are becoming available.

Purchasers should be careful to check the call provisions of the issues. Most are callable on or after a specified date, usually at $10 or $25/share. Paying a premium over the call price can result in having the issued called out from under you at a loss. Call prices sometimes hold down the price of an issue resulting in what appear to be above market yields. Due caution is advised of high yield issues.

The uncertainty of issuing investment banks poses questions about the future of these products. Presumably, they are a profitable business not requiring high leverage and likely to be continued by new owners once current financial difficulties are resolved.


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