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Income Deposit Security (IDS) Defined
An income deposit security is a hybrid financial security. It is considered a hybrid because it shares the qualities of both a high-yield note and common stock. Another name for it is “enhanced income security”. The sole purpose of selling them is to provide pay income regularly to the security holder. The payments range from interest payment from bonds and payments through dividends from shares.
A Little More on What is an Income Deposit Security
Income Deposit Securities are listed on public exchanges for sale. These securities can be traded together or individually after its component parts have been separated. What draws investors mainly are the features that are combined and the ability of stock capital to appreciate once it has been included in the Income Deposit Security.
When talking about tax, payments made from an Income Deposit Security can be divided into two groups. The first can be termed to be an ordinary taxable dividend while the second one can be seen as a capital return. Capital gains rate is used to tax capital returns which indicates a situation where the owner sells the shares. On the other hand, interests are taxed as ordinary income.
Income Deposit Security Issuers
Usually, stable and established companies are the ones who issue an income deposit security. This is paramount, as they must be capable of making payment of interest from the free cash flows. In the case of a subordinated security, the higher amount is paid by the issuer as against an unsubordinated note. The major idea behind the issuance of these securities by companies is for the sole purpose of creating a tax shield. Companies can reduce their operating income by deducting interest payments from it.
An Example of IDS
An example is the IDS issued in past is B&G Foods, Inc. which was written by the Royal Bank of Canada. It combined a share of Class A common stock with a 12% senior subordinated note which was due in 2016. The IDS payment was a cash dividend of $0.2120 per share quarterly. It also paid an interest of $0.2145 per $7.15 principal amount of the notes.
B&G Foods, Inc. is a scenario of a past IDS issued. The Royal Bank of Canada wrote it. It merged a 12 percent senior subordinated note that was due in 2016 along with common stock. The income deposit security payment $0.2120 cash dividend per share on a quarterly basis. $0.2145 per $7.15 principal amount of the notes was paid as interest.
References for Income Deposit Security
Academic Research on Income Deposit Security (IDS) Defined
- The evolution of income trusts, Willoughby, R., Kau, A., Gartner, G., & Cardarelli, C. (2003). Int’l Tax Rev., 15, 45. This article defines Income Deposit Security. It pays attention to how income trusts evolved and became established.
- Canadian Income Funds: An Attractive Financing Alternative for Canadian and US Franchisors, Hudec, A. J., & Rogers, J. L. (2004). Franchise LJ, 24, 112. This work explicates the Canadian income funds with an aim at finding a favorable financing alternative for US and Canadian Franchisors.
- Canadian income trusts come of age, Romano, S., & Singer, J. (2005). Int’l Fin. L. Rev., 24, 53. This research work talks about Canadian income trusts and its level of maturity.
- Pricing and Performance of Income Deposit Securities, Blagoev, A., & Von Wyss, R. (2011). This article focuses on income deposit securities, its price, as well as, its performance. IDS refer to exchange-traded units which have two different components. These components are a subordinated note and a common share. IDS was introduced in the United States in 2003. This works examines the value of IDSs at IPO and also engages in an analysis of how the secondary market performs. Based on the findings on IDS companies, it is discovered that income deposit securities were, on the average, slightly valued at IPO. Based on the dynamic return-based analysis, it is found that for major companies, the equity component surpasses IDS returns.
- The trouble with income trusts, Edgar, T. (2009). This study explicates the problem and challenges faced with income trusts. It focuses on how efficient and effective income trusts. It shows the problem associated with using income trusts to hold shares directly. The problem with developing an equity re-characterization rule is the assurance that it will apply perfectly to structures which realize the exact same effect which the basic income trust structure realizes.
- IRS Ruling Facilities Debt-Equity Unit Offerings in Cross-Border IPOs, Glicklich, P. A., & Eiref, A. M. (2004). J. Tax’n Fin. Products, 5, 43. This article explores cross-border IPOs generally.
- Security system of credit cards provided by NCC Bank Ltd., Zaman, A. (2017). This article focuses on NCC Bank Ltd. And the credit card security system they provide.
- Specialised farm credit institutions: a model of supply-leading finance for farmers in low income countres, Von Pischke, J. D. (1978). This paper analyzes farm credit institutions that are specialized. It focuses on farmers located in low-income countries.
- Stapled Securities–” The Next Big Thing” for Income Trusts? Useful Lessons from the US Experience with Stapled Shares, Avi-Yonah, R. S., Edgar, T., & Shaheen, F. (2007). This article explores stapled securities. It presents it as the next major thing for income trusts. It shares insights from the experiences the US has had with stapled shares. Two distinct sets of legislation have been introduced by the Department of Finance trying to limit income trust market demand. The article showcases how stapled securities are utilized as a holding structure which can help in avoiding the application of the latest legislative proposal by the department. In order to ensure that the draft legislation is effective, some kind of rule based on equity re-characterization is needed.
- Low Income Dynamics in 1990s Britain, Jarvis, S., & Jenkins, S. P. (1998).IDS Bulletin, 29(1), 32-41. This article examines Britain’s low-income dynamics as at the 1990s. The first 4 waves of Britain’s Household Panel Survey are used in this article. The income turnover is very low even though the persistently poor group is very small. The shocking aspect is the high number of low-income entrants and escapers from a year to another. The need for continuous low-income spells is demonstrated based on the simulations estimating low income exit and its re-entry. The low-income spells are used to explain how someone experiences low income within a specific timeframe.
- Interest Rate Futures, Keen, H. (1980). Federal Reserve Bank of Philadelphia Business Review Nov/Dec, 13-22. This article explores interest rate futures.