Banking Terms - Set 29 (Taxable Preferred Securities, Senior Security, Chargeback, Convertible Security)

Taxable Preferred Securities

A type of preferred equity security that does not qualify for the dividends-received deduction for corporations of typical preferred securities, defined in Section 243 of the Internal Revenue Service (IRS) Code. Taxable preferred securities are usually junior level liabilities, and the coupons tied to them can either be fixed or variable, and for indefinite or specific maturities.

As with regular preferred stocks, these securities trade like bonds with regular denominations of $25 par and $1,000 par. The dividends paid are treated as regular income instead of dividends to the investor, but receive favorable tax treatment for the issuing company.

Senior Security

A security that ranks above another security in the event of the company's bankruptcy or liquidation. A senior security is called such, because it is considered "senior" to another in the company's hierarchy of capital providers. Should the company go bankrupt or face another liquidating event, holders of the senior-most security will be in line to receive repayment of their invested monies first, before other creditors receive any payment. Next in line would be holders of the second-most senior security. 

For an instance, debt is always considered senior to equity. In terms of debt, secured debt is considered senior to unsecured debt, such as debentures, while preferred securities are considered senior to common shares.

Chargeback

A credit card transaction that is billed back to the merchant after the sale has been settled. Chargebacks are initiated by the card issuer on behalf of the cardholder and typically involve product delivery failure or product/service dissatisfaction.

Convertible Security

A convertible, sometimes called a CV, is either a convertible bond or a preferred stock convertible. A convertible bond is a bond that can be converted into the company's common stock. You can exercise the convertible bond and exchange the bond into a predetermined amount of shares in the company. The conversion ratio can vary from bond to bond. You can find the terms of the convertible, such as the exact number of shares or the method of determining how many shares the bond is converted into, in the indenture. For example, a conversion ratio of 40:1 means that every bond (with a $1,000 par value) you hold can be exchanged for 40 shares of stock. Occasionally, the indenture might have a provision that states the conversion ratio will change through the years, but this is rare.