Pros and Cons of Trust Preferred Securities

Trust preferred securities are a type of investment that is commonly offered by bank holding companies. These investments contain some aspects of both debt and equity which makes them unique in the financial industry. A company will set up a trust and keep all of the common stock in the trust. Then, it will offer preferred stock to the investors in the company. Here are a few of the pros and cons of trust preferred securities.


One of the advantages of investing in trust preferred securities is that you will receive regular interest payments. In fact, you will get interest payments once every quarter. This can provide you with a regular source of income.

Another advantage of this type of investment is that you can redeem them early if you need access to the cash. Generally, these assets are established to be long-term obligations. In most cases, you can expect them to last as long as 30 years. However, if you need to cash them out early, you are able to do so. This provides you with liquidity and gives you an option if you have to come up with some cash in a hurry.

Another advantage of investing in trust preferred securities is that you can earn higher interest rates. These securities typically come with high interest rates because investors have to get paid more because they are taking more risk. This type of security is subordinate to most other types of debt that can be issued by a company. This means that if the company goes out of business, the investor may not be able to get their initial investment back. To make up for this risk, the companies will typically offer a much higher rate of return. This makes it a more attractive investment than preferred stock or a bond in many cases.


The subordinate position of this type of debt can be an issue. This makes it a type of investment that is not necessarily considered to be safe. If the company has financial problems and goes out of business, you may lose your entire investment. When you are dealing with a corporate bond, this would not be the case. If the company went out of business and you had a traditional corporate bond, you would at least be able to get your principal back in most cases. Corporate bonds are senior to trust preferred securities. There is generally not be enough assets left over after a bankruptcy to pay back trust preferred securities holders. 

These types of securities can also negatively affect the financial situation of the financial institutions that offer them. The financial institutions get to count this money as assets. Even though this is technically a debt that the company has to repay the investor at some point.

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