Monday, June 6, 2011

Trust Certificate DHM Redeemed According to Fidelity

I noticed a few minutes ago that the Trust Certificate DHM had been redeemed at its $25 par value plus accrued interest of $5.11.  I had not seen any information about this call prior to today.  This is a snapshot of the redemption of a 50 share position:

I attempted to find information about the call, by checking a variety of sources, and have not yet seen any information about this call event.  I am curious why the exchange allowed 300 shares to be traded this morning, if the security has in fact been called for redemption today.

FINRA Information on Underlying Bond: FINRA

DHM Prospectus: Prospectus Supplement

This TC had a 8.125% coupon, higher than the underlying Sprint Capital bond, which had a 6.875% coupon.  With the higher number of bonds needed to support the TC's coupon, it could be advantageous for the owner of the call warrant to exercise its option, even when the underlying bond is trading near par.  I showed how that would work in a similar situation, where the warrant was exercised for XFJ which had a 8.375% coupon with the underlying bond at 6.5%:  Item # 7   More on Call Warrants and TCs

Please note that Fidelity incorrectly classifies the "accrued interest" paid at redemption as a "dividend".  I have informed them of this error.  Other brokerage firms do not make it, but Fidelity makes several erroneous classifications in this type of security. 

The TC is a security that represents an undivided interest in the assets owned by a trust, and those assets are bonds. The trustee collects the interest paid by the issuer and flows that interest payment to the owners of the trust certificate pursuant to the terms of the prospectus. The TC may have a higher or lower coupon than the underlying bond, or the same, and variations in the coupon will be justified by the amount of bonds originally deposited into the trust.  

Fidelity is better than other firms that I use in noting the receipt of dividend and interest payments, or other types of corporate actions. Schwab, Vanguard and other firms would not note a dividend or interest payment until the day after it is paid into the account, and there is no excuse for that delay.  

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