High yield does not have to mean high risk—preferred securities offer investors a compelling middle ground, providing attractive income, total returns and portfolio diversification from high-quality issuers.
KEY TAKEAWAYS
- A large and unique asset class with interest rate resilience
Preferreds are an appealing investment primarily issued in less-rate-sensitive structures, by noncyclical companies with stable business models in regulated industries that are under-represented in other fixed income categories. - High income and other valuable investment characteristics
Preferreds have historically delivered high (often tax-advantaged) income, strong total returns and diversifying correlations with other fixed income asset classes. - Enhanced risk/return potential for fixed income portfolios
An allocation to preferreds in a broad fixed income portfolio may increase income and total return while keeping the risk profile relatively stable. Active investment managers may add value by accessing opportunities globally.
A large and unique asset class
Preferred securities are unique among fixed income investments
Preferreds hold a distinctive position in capital markets, yet they are frequently an underappreciated investment option. They are a form of equity for issuers, helping companies reach capitalization goals for regulatory and rating agency purposes. However, from an investor standpoint, preferreds act like bonds, not stocks—they simply offer a fixed or floating rate of income. Issued at par like debt instruments, their market prices fluctuate with changes in interest rates and credit fundamentals; hence, preferreds can trade at premiums or discounts to par value.
Preferred securities lie between common stock and senior debt in a company’s capital structure (Exhibit 1). Preferred shareholders rank below senior debtholders in the event of liquidation—presenting subordination risk that partly explains preferreds’ higher income and wider credit spreads. Additionally, preferred coupon payments are discretionary and subject to deferral or outright omission, but such actions are extremely rare in practice, typically only occurring in cases of great corporate strain.
Preferreds come in two varieties: perpetual and hybrid. Perpetual preferreds are special forms of high-dividend-paying equities that have existed for more than a century. Hybrid preferreds are a more modern invention, created in the 1990s. These instruments are forms of long-term, junior subordinated deferrable debt. As forms of debt, they pay interest income.
EXHIBIT 1
While typically high quality, preferreds are subordinated to conventional debt instruments
Credit class rankings

At December 31, 2024. Source: Cohen & Steers.
(a) Other regulatory benefits may apply. Ratings examples are representative of various securities from a given company.
A broad and liquid universe
The $1.3 trillion global preferred securities universe is large and liquid, offering ample investment opportunities. There are two distinct trading markets for preferreds (Exhibit 2). Exchange-traded preferred securities are designed for retail investors, typically with $25 par shares that pay quarterly dividends and offer the trading ease of an exchange (predominantly the New York Stock Exchange). While the U.S. exchange-traded market is fairly large (around $180 billion), issuers are increasingly turning to the far larger, institutionally traded over-the-counter (OTC) preferreds market, which is valued at more than $1 trillion globally across currencies. OTC preferreds trade just like bonds, in $1,000 par increments and generally in $1 million blocks. Many are in 144A and Regulation S (offshore) format, requiring institutional status and/or a local presence for purchase(1). Like bonds, OTC preferred securities typically pay dividends semiannually.
One type of OTC preferreds, which makes up approximately 25% of the total market, is contingent capital (“CoCo”) securities. CoCos are widely used by financial issuers outside of the U.S. to meet capital requirements. These securities will write down or convert to common stock in the event that the issuer’s capital level falls below a particular threshold or if the bank reaches a point of nonviability. Given this risk, CoCos can offer excess compensation relative to other fixed income segments.
Another notable feature of the OTC preferreds market is that it is dominated by lower-duration, fixed-to-fixed-rate or fixed-to-floating-rate securities. In contrast, the exchange-listed market is dominated by issues that pay fixed rates of income. We will discuss the differences between these structures in greater detail, but for now, it is worth noting that the OTC market tends to offer a lower level of interest rate risk. The OTC market may also offer superior levels of call protection for investors (longer periods for which the issuer cannot redeem the security); many new-issue OTC securities have up to 10 years of call protection, compared with the five-year norm in the exchange- listed market.
EXHIBIT 2
A large, global institutional market
Total preferreds market size: $1.3 trillion

At December 31, 2024. Source: Bloomberg, Cohen & Steers.
Past performance is no guarantee of future results. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. There is no guarantee that any market forecast set forth in this presentation will be realized. Market size is based on par values of approximately 1,683 capital securities and other deferrable debt instruments denominated in USD, EUR and GBP and issued in the major domestic and Eurobond markets. Generally, denomination size must be a minimum of US$100 million if issued in the U.S. retail market, US$150 million if issued in the U.S. institutional market, EUR 200 million, or GBP 200 million to qualify for inclusion in our universe. Mandatory convertible preferred securities are excluded, and exchange-traded senior debt securities are included. Other issuers include the Cayman Islands, Puerto Rico, Qatar, Russia, South Africa, Togo, United Arab Emirates and Israel; some supranational securities are also included. Numbers may not sum due to rounding.
(1) 144A is a Securities and Exchange Commission rule allowing qualified institutional investors to buy and trade unregistered securities. Regulation S applies to security offerings made outside the United States by both U.S. and foreign issuers, and provides an exclusion from the Section 5 registration requirements of the Securities Act of 1933. A securities offering (whether private or public) made by an issuer outside of the United States in reliance on Regulation S need not be registered under the Securities Act.
A complement within fixed income
It is no coincidence that the issuers of preferred securities are mainly large, highly regulated institutions and/or companies with high, stable and transparent cash flows—such as banks, insurance companies, utilities, pipeline companies and real estate investment trusts (REITs). Given the discretionary nature of dividend payments, investors generally demand high-quality, tested business models, which may provide an adequate comfort level that the expected income will be delivered.
Because of these characteristics, preferreds can bring attractive diversification benefits when included in portfolios with corporate bond and high-yield allocations, as the asset classes have different sector exposures (Exhibit 3). The main sectors that issue preferreds represent less than 40% of sector exposure in corporate bonds and even less in high-yield bonds. High yield, for instance, has a significant energy sector component, whereas the preferreds market has little exposure to those typically cyclical and leveraged companies. In contrast to the corporate bond market, financial companies account for more than half of the preferreds universe (and have less cyclical features).
EXHIBIT 3
Low sector overlap with other fixed income classes
Sector weight representation

At December 31, 2024. Source: Bloomberg, Cohen & Steers.
Past performance is no guarantee of future results. The information presented above does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. Preferred securities represented by 55% ICE BofA US IG Institutional Capital Securities Index, 20% ICE BofA Core Fixed Rate Preferred Securities Index, and 25% Bloomberg Developed Market USD Contingent Capital Index. The ICE BofA US IG Institutional Capital Securities Index is a subset of the ICE BofA US Corporate Index including all fixed-to-floating rate, perpetual callable and capital securities. See endnotes for all index associations, definitions and additional disclosures.
Regulatory reforms have led to solid financial industry fundamentals
Some investors remain leery of banks given the well-publicized 2023 failures of a few U.S. regional banks and Credit Suisse’s forced sale to UBS. However, those failures were idiosyncratic, not symptomatic of issues underlying the banking sector. The credit fundamentals of financial companies have improved dramatically since the global financial crisis. Under rules recommended by the Basel Committee on Banking Supervision (i.e., Basel III) the regulatory requirements governing banks globally have become far more stringent.
The asset quality, funding and capital of the majority of large banks in the U.S. and other developed markets today are strong. U.S. bank capital reached record levels in 2024, with solid earnings supporting capital building and retention. On average, bank capital levels today are around twice as strong as in 2008. We believe strong capital and reserves provide a cushion against future loan losses and may provide a credit tailwind for the industry.
Preferred securities offer the potential for attractive total returns that can be resilient even in a rising interest rate environment.
Security structures that may help mitigate interest rate risk
Preferred securities offer the potential for attractive total returns that can be resilient even in a rising interest rate environment. While many issues are long term or perpetual, lower-duration fixed-to-reset structures dominate the OTC market. (They are also available on a more limited basis in the exchange-traded market.) Such structures have proven to help cushion the impact of a rising interest rate environment.
We can measure the potential interest rate risk by examining a security’s duration—a mathematical calculation of the average life of a fixed income or preferred security that measures the security’s price risk with respect to changes in interest rates (or yields). Generally, the higher the duration, the greater the price change response will be to a given rise or fall in the demanded yield of the security.
There are different structures in the preferreds market, which lead to very different duration (interest rate risk) profiles (Exhibit 4).
EXHIBIT4
A preferred security’s duration is largely determined by its structure
Hypothetical examples

At December 31, 2024. Source: Cohen & Steers.
This chart is for illustrative purposes only and does not reflect information about any fund or other account managed or serviced by Cohen & Steers. Duration measures the price sensitivity of a fixed income or preferred security to changes in interest rates (or yields). The higher the duration, the greater the price change in response to a rise or fall in yield. The duration of a preferred security depends, in part, on how it is structured. Fixed-rate security duration assumes the security trades at a discount to par. Duration of a floating-rate preferred security will be highly dependent on the reference rate (the rate off of which the security floats) and whether that reference rate is the rate that is moving. (a) SOFR: Secured Overnight Financing Rate.
Attractive investment characteristics
Higher income levels, both before and after taxes
Investment-grade preferred securities typically offer some of the highest income rates in high-grade fixed income markets. Moreover, the net after- tax income from preferreds may be higher than that available from other taxable fixed income types, even tax-exempt bonds (Exhibit 5).
Individual investors: Many preferred securities pay qualified dividend income (QDI), which for U.S. investors is taxed at just 20%, plus the 3.8% Medicare surcharge, for top earners (compared with 37% + 3.8% for interest income). The combination of high income rates and lower taxes has historically given preferreds an after-tax yield advantage over other fixed income categories. Exhibit 5 illustrates pre- and post-tax income rates, assuming QDI taxes for investment-grade preferreds, compared with a few other fixed income assets. For top earners, preferreds offer after-tax yields on par with high-yield bonds, which are typically five or more notches lower in credit quality (BBB vs. B+) and entail significantly more credit risk.
Corporate investors: U.S. institutional investors structured as
C-corporations can take advantage of the “dividends received deduction” (DRD) tax treatment, reducing the tax rate on income from qualifying preferreds. For a corporate investor with a 21% tax rate, the effective tax on preferred income may fall to just 10.5%. This means a DRD-eligible preferred paying 6.0% would have an after-tax yield of 5.4%, compared with just 4.7% for a non-DRD security with the same pre-tax yield.
EXHIBIT 5
Preferreds offer high income for high-quality issuers
Pre-and post-tax fixed income yields (%)

At December 31, 2024. Source: ICE BofA, Cohen & Steers.
Past performance is no guarantee of future results. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. An investor cannot invest directly in an index, and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations, as volatility and other characteristics may differ from a particular investment. The above is not intended to serve as tax advice. Investors should consult with their respective tax advisors prior to investing. (a) Yields are shown on a yield-to-maturity basis. (b) Assumes taxation at the highest marginal U.S. federal income tax rates of 37% for taxable interest income and 20% for QDI, with an additional 3.8% Medicare surcharge on all tax rates. After-tax calculations assume preferred securities income is taxed at the respective qualified dividend rate and marginal tax rate on a 65/35 blended basis. All other securities reflect full taxation at the respective marginal rates based on income. State and local taxes are not included in these calculations. See endnotes for index associations, definitions and additional disclosures
Returns driven mainly by high income and low default rates
Across full market cycles, preferred securities tend to be among the top- performing fixed income categories. The return experience in the 10 years through December 2024 shows how preferreds compare favorably to investment-grade and high-yield bonds, particularly on an after-tax basis (Exhibit 6).
The substantial income advantage of preferreds was the most significant driver of their outperformance, relative to other investment-grade securities in the last 10 years. The price performance of preferreds also reflects their quality, with little influence from defaults or impairments, which often act as a drag on the performance of high-yield bonds. Preferreds are rated on the same scale as debt instruments. Depending on the issuer and structure, preferred stocks may be rated up to six notches lower than the senior debt of the same issuer. Since companies can suspend preferred dividend payments without stopping bond payments, the agencies perceive a higher default probability for a preferred than for a bond from the same issuer.
However, a Moody’s study showed that the impairment rates (defaults or missed payments) for preferred securities they rated were “…similar to average cumulative default rates of global corporates overall and by like rating category.”(2) Similarly, in a study encompassing 40 years of data, S&P Global’s analysis of global financial services companies (the main issuers of preferreds) showed that BBB–/BB+ rated securities (typical ratings for most preferreds) historically had default rates under 1%(3). In contrast, defaults on high-yield bonds have averaged 3.6% annually (and at times have been much higher). As a result, preferreds often remain more appealing than high-yield bonds, as the latter’s cyclical defaults typically erase their income advantage.
EXHIBIT 6
Preferreds’ solid relative returns are supported by their high income rates
10-year annualized total return (%)

At December 31, 2024. Source: Moody’s Investors Service, Bloomberg, Cohen & Steers
Past performance is no guarantee of future results. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. An investor cannot invest directly in an index, and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations as volatility and other characteristics may differ from a particular investment. Assumes taxation at the highest marginal U.S. federal income tax rates of 37% for taxable interest income and 20% for QDI, with an additional 3.8% Medicare surcharge on all tax rates. After-tax calculations assume preferred securities income is taxed at the respective qualified dividend rate and marginal tax rate on a 65/35 blended basis. All other securities reflect full taxation at the respective marginal rates based on income. State and local taxes are not included in these calculations. Numbers may not sum due to rounding. See endnotes for index associations, definitions and additional disclosures.
(2) “Default, Transition, and Recovery: 2021 Annual Global Financial Services Default and Rating Transition Study,” S&P Global, December 2022.
(3) “Recovery Rates on Defaulted Corporate Bonds and Preferred Stocks, 1982–2003”, Moody’s Special Comment, December 2003.
Low correlations with other asset classes
Preferred securities have shown diversifying correlations with both equities and other fixed income asset classes. This is partly because banks and insurance companies, the largest issuers of preferred securities, are typically not well represented in other fixed income strategies (such as high-yield bonds). Exhibit 7 shows the 10-year correlation of the selected investment strategies with one another. Low correlations with other asset classes provide strong support for preferred securities as a portfolio diversifier.
EXHIBIT 7
Preferreds can offer attractive correlations with other income sources
10-year correlations of monthly returns

At December 31, 2024. Source: ICE BofA, Cohen & Steers.
Past performance is no guarantee of future results. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. An investor cannot invest directly in an index, and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations, as volatility and other characteristics may differ from a particular investment. Correlations vary from -1.0 (perfect inverse relationship) to 1.0 (perfect synchronization). (a) Preferred securities are represented by 50% ICE BofA Capital Securities Index and 50% ICE BofA Fixed Rate Preferred Securities Index through 12/31/2016. Thereafter, it consists of 60% ICE BofA US IG Institutional Capital Securities Index, 30% ICE BofA Core Fixed Rate Preferred Securities Index, and 10% Bloomberg Developed Market USD Contingent Capital Index through 12/31/2018. Thereafter, it consists of 60% ICE BofA US IG Institutional Capital Securities Index, 20% ICE BofA Core Fixed Rate Preferred Securities Index, and 20% Bloomberg Developed Market USD Contingent Capital Index through 3/31/2022. Thereafter, it consists of 55% ICE BofA US IG Institutional Capital Securities Index, 20% ICE BofA Core Fixed Rate Preferred Securities Index, and 25% Bloomberg Developed Market USD Contingent Capital Index. See endnotes for index associations, definitions and additional disclosures.
For investors looking beyond traditional fixed income, preferred securities may offer an attractive solution.
Enhanced risk/return potential with preferreds
Since the correlations of preferreds with other fixed income and equity assets have historically been somewhat modest, the securities may have the potential to improve the risk-adjusted returns of diversified portfolios. To illustrate this potential, Exhibit 8 shows, how over the past 10 years, a 20% allocation to preferred securities in a broad fixed income portfolio has increased income and total return while keeping the risk profiles relatively stable.
Investors interested in accessing preferreds should note that these securities typically account for only very small portions of large bond funds, including bond-focused ETFs.
Investors may choose to source a dedicated preferreds allocation from many possible existing allocations; for example, the chart below shows adding from corporates, mortgage-backed bonds and emerging market debt.
EXHIBIT 8
Preferreds securities may improve risk-adjusted returns
Sample fixed income asset allocation portfolios over 10 years

At December 31, 2024. Source: Morningstar, Cohen & Steers.
Past performance is no guarantee of future results. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations as volatility and other characteristics may differ from a particular investment. Taxable fixed income portfolio consists of 30% U.S. Treasuries, 25% corporate bonds, 25% mortgage-backed securities, 15% emerging market debt, and 5% high-yield bonds. Taxable fixed income portfolio with 20% preferreds consists of 30% U.S. Treasuries, 15% corporate bonds, 20% mortgage-backed securities, 10% emerging market debt, 5% high-yield bonds, and 20% preferred securities. After-tax returns and yields based on yield to maturity, using 2024 tax rates (assumes taxation at the highest marginal federal income tax rates of 37% for taxable interest income and 20% for QDI, with an additional 3.8% Medicare surcharge on all tax rates). After-tax calculations do not include state and local taxes. Preferred securities are assumed to be taxed as 65% QDI-eligible income and 35% interest income. Diversification does not ensure a profit or protect against loss. (a) Risk is measured as the standard deviation of the portfolio. (b) Sharpe ratio is a measure of efficiency utilizing the relationship between annualized risk-free return and standard deviation. The ratio is computed by subtracting the return of the risk-free index from the return of the manager to determine the risk-adjusted excess return, which is then divided by the standard deviation. The higher the Sharpe ratio, the greater the efficiency produced by the manager. See endnotes for index associations, definitions and additional disclosures.
Market inefficiencies can create opportunities for active managers
In our view, preferred securities offer a number of distinctive features and benefits, including high income (potentially with tax advantages), strong total returns and diversifying correlations from a large, global universe of high-quality issuers with stable business models that are less affected by economic fluctuations.
Preferred securities can complement, diversify and improve a fixed income investment allocation. Yet these instruments are complicated, and the market is inefficient.
Active managers have the means to make portfolio adjustments to address changing market conditions, using tools to manage duration, credit risk and interest rate risk to potentially reduce volatility and achieve better risk- adjusted returns. In our experience of managing preferreds, we have found that greater diversification (whether by issuer, sector or region) offers more relative value opportunities and a superior ability to manage risks.
In today’s environment, we believe a combination of global reach and active management—based on dedicated research into preferred securities markets and issuers—is the best formula for pursuing desired results.
A dedicated preferreds manager can help investors navigate complex markets and achieve desired total return and yield objectives.
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Index definitions and important disclosures
An investor cannot invest directly in an index, and index performance does not reflect the deduction of any fees, expenses or taxes.
Preferred securities: Investment grade: OTC: ICE BofA U.S. I.G. Institutional Capital Securities Index (credit quality: BBB) tracks the performance of USD-denominated investment-grade hybrid capital corporate and preferred securities publicly issued in the U.S. domestic market. Retail: ICE BofA Fixed Rate Preferred Securities Index (credit quality: BBB) tracks the performance of fixed-rate U.S. dollar-denominated preferred securities issued in the U.S. domestic market. High yield: The ICE BofA High Yield Fixed Rate Preferred Securities Index (credit quality: BB+) tracks the performance of fixed-rate USD-denominated preferred securities issued in the U.S. domestic market.
CoCos: The Bloomberg Developed Market Contingent Capital Index (credit quality: BB+) includes hybrid capital securities in developed markets with explicit equity conversion or write-down loss-absorption mechanisms that are based on an issuer’s regulatory capital ratio or other explicit solvency-based triggers. Exhibits 3, 5 and 8: ICE BofA All Capital Securities Index tracks the performance of U.S. dollar-denominated corporate debt publicly issued in the U.S. domestic market, consisting of fixed-to-floating-rate, perpetual callable and capital securities. Investment-grade bonds: ICE BofA Corporate Master Index (credit quality: A-) tracks the performance of U.S. dollar-denominated investment-grade corporate debt publicly issued in the U.S. domestic market. High-yield bonds: ICE BofA High Yield Master Index (credit quality: B+) tracks the performance of U.S. dollar-denominated below- investment-grade corporate debt publicly issued in the U.S. domestic market. Municipal bonds: ICE BofA Municipal Master Index (credit quality: AA-) tracks the performance of U.S. dollar-denominated investment-grade tax- exempt debt publicly issued by U.S. states and territories, and their political subdivisions, in the U.S. domestic market. Money market funds: ICE BofA 0-3 Month U.S. Treasury Bill Index tracks the performance of U.S. Treasury bills with a remaining maturity of three months. U.S. Treasuries: ICE BofA U.S. Treasury Index tracks the performance of U.S. dollar-denominated sovereign debt publicly issued by the U.S. government in its domestic market.
Mortgage-backed securities: Bloomberg US MBS Index covers the mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC). TIPS: Bloomberg U.S. Treasury Inflation Notes Total Return Index tracks the performance of U.S. Treasury Inflation Protected Securities with at least $1 billion in outstanding face value and a remaining term to maturity greater than one year. Agencies: ICE BofA U.S. Composite Agency Index tracks the performance of U.S. dollar-denominated investment-grade U.S. agency debt issued in the U.S. domestic market. Bank loans: Credit Suisse Leveraged Loan Index tracks the investable market of the U.S. dollar-denominated leveraged loan market. Emerging market debt: Bloomberg EM USD Aggregate Index tracks U.S. dollar-denominated debt from sovereign, quasi-sovereign and corporate EM issuers. Bloomberg U.S. Aggregate Bond Index is a broad-market measure of the U.S. dollar-denominated investment-grade fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities, and commercial mortgage-backed securities. U.S. bank common equities: KBW Bank Index is designed to track the performance of the leading banks and thrifts that are publicly traded in the U.S. Equities: S&P 500 Index is an unmanaged index of 500 large-capitalization stocks that is frequently used as a general measure of U.S. stock market performance.
Data quoted represents past performance, which is no guarantee of future results. This material is for informational purposes and reflects prevailing conditions and our judgment as of this date, which are subject to change. There is no guarantee that any market forecast set forth in this presentation will be realized. This material represents an assessment of the market environment at a specific point in time and should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment, and is not intended to predict or depict performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or to take into account the specific objectives or circumstances of any investor. We consider the information in this presentation to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment. Please consult with your investment, tax or legal professional regarding your individual circumstances prior to investing.
Risks of investing in preferred securities. An investment in a preferred strategy is subject to investment risk, including the possible loss of the entire principal amount that you invest. The value of these securities, like other investments, may move up or down, sometimes rapidly and unpredictably. Our preferred strategies may invest in below-investment-grade securities and unrated securities judged to be below investment grade by the Advisor. Below-investment-grade securities or equivalent unrated securities generally involve greater volatility of price and risk of loss of income and principal, and they may be more susceptible to real or perceived adverse economic and competitive industry conditions than higher-grade securities. The strategies’ benchmarks do not contain below-investment-grade securities.
Contingent capital securities (CoCos). CoCos are debt or preferred securities with loss-absorption characteristics built into the terms of the security—for example, a mandatory conversion into common stock of the issuer under certain circumstances, such as the issuer’s capital ratio falling below a certain level. Since the common stock of the issuer may not pay a dividend, investors in these instruments could experience a reduced income rate, potentially to zero, and conversion would deepen the subordination of the investor, hence worsening the investor’s standing in a bankruptcy. Some CoCos provide for a reduction in the value or principal amount of the security under such circumstances. In addition, most CoCos are considered to be high-yield securities and are therefore subject to the risks of investing in below-investment-grade securities.
Duration risk. Duration is a mathematical calculation of the average life of a fixed income or preferred security that serves as a measure of the security’s price risk to changes in interest rates (or yields). Securities with longer durations tend to be more sensitive to interest rate (or yield) changes than securities with shorter durations. Duration differs from maturity in that it considers potential changes to interest rates, and a security’s coupon payments, yield, price and par value and call features, in addition to the amount of time until the security matures. Various techniques may be used to shorten or lengthen the Fund’s duration. The duration of a security will be expected to change over time with changes in market factors and time to maturity.
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