BUFFALO, N.Y. – Corporate retail notes are an attractive
option for individual investors but generally provide lower returns
than mainstream corporate bonds, according to a new study from the
University at Buffalo School of Management.
Published in the most recent Journal of Fixed Income, the study
says that individual investors face two important obstacles when
investing in corporate bonds: availability and trading costs.
Retail notes, a debt security issued directly to individuals
through brokers in small denominations, typically on a weekly
basis, have proven to be a popular solution to these obstacles. The
notes also trade over the counter; however, trading is very
“Retail notes are designed for easy purchase by individual
investors,” says study co-author Joseph Ogden, PhD, professor
of finance and managerial economics in the UB School of Management.
“But they tend to be overpriced at the start, primarily
because most are callable at par value with short deferment
periods. That means the corporation you bought the note from can
buy it back before it’s fully mature, relatively soon after
it was issued — and you lose out on interest.”
The study analyzed the pricing and performance of 1,775 retail
notes issued by industrial firms from 2005 to 2009, comparing their
offering yields and prices, as well as returns, to benchmark
indexes of mainstream corporate bonds matched on rating and
Results showed that yields on new callable retail notes do not
typically contain a call premium, that average returns are lower
for callable notes than for non-callable notes, and that the
majority of callable notes are called shortly after the deferment
Ogden says there are a few reasons that the notes have been
popular despite their low performance.
“Individual investors may be willing to accept lower
yields and returns on new retail notes because they tend to be more
readily available than mainstream bonds,” says Ogden,
“and because the notes allow investors to avoid the trading
costs on mainstream corporate bonds, which is important in the
current low interest rate environment.
“Additionally, some investors may place a high personal
value on the ‘death put’ provision — an option
included in all retail notes that allows the investor’s
estate to sell the bond back at par value if the investor
Ogden collaborated on the study with Igor Kozhanov, financial
economist in the Division of Economic and Risk Analysis at the U.S.
Securities and Exchange Commission.
The UB School of Management is recognized for its emphasis on
real-world learning, community and economic impact, and the global
perspective of its faculty, students and alumni. The school also
has been ranked by Bloomberg Businessweek, the Financial Times,
Forbes and U.S. News and World Report for the quality of its
programs and the return on investment it provides its graduates.
For more information about the UB School of Management, visit http://mgt.buffalo.edu.