General Electric Co., Duke  Energy Corp., and Ford  Motor Co. are enticing a growing number of individuals to buy their debt  through investments pitched as higher-yield alternatives to checking accounts and money funds.

These and other companies that sell the debt, called floating-rate demand  notes, are exploiting frustration with money-market funds paying an average 0.03  percent as of May 29 and bank savings accounts at 0.13 percent. The notes, which  usually require a minimum deposit such as $500 or $1,000 and offer checks to  access the money, are paying 1 percent to 1.6 percent.

The notes help companies diversify their funding, which is skewed to  securities such as commercial paper and bonds bought mainly by institutions. For  retail investors, they provide less protection than an insured bank account or a  money fund that holds debt from many issuers. The notes aren’t secured.

“It looks like these programs are a much better deal for the company than  they are for the individual investor,” saidDavid  Sekera, corporate bond strategist at Chicago-based research firm Morningstar  Inc. “These programs don’t appear to pay enough extra spread over  money-market funds to compensate the investors for the credit risk and lack  of diversification.”

Issuers generally can change payout rates weekly. Duke Energy, a Charlotte,  North Carolina-based utility, and Ford Credit, the company’s finance unit,  promise to pay at least 0.25 percent more than the average money fund rate.  Fairfield-based GE doesn’t guarantee a minimum.

“Looking for CD or Money Market Rates? You can do better,” according to the  marketing on GE’s Interest Plus website. The notes are issued by GE Capital, the  finance unit of the industrial and financial-services company. GE has been  offering the notes to individuals since 1992. It had $8.7 billion outstanding as  of March 31, compared with $5.6 billion at the end of 2008.

“The real benefit of this product is flexibility,” Russell  Wilkerson, a spokesman for GE Capital, said. “It allows customers to come in  without a sales fee and exit at any time without a penalty. That supreme  flexibility and an attractive yield is the strength of the offering.”

If a corporation selling these notes defaulted, investors’ money would  probably be tied up in bankruptcy court, and they may lose a significant portion  of their investment, Sekera said.

“I like to call them a bond with a checkbook,” said John  Heffernan, director of the PremierNotes program at Duke Energy. “The unique  thing about this is we’re selling them directly to the investors.”

Duke Energy started offering floating-rate notes to individuals about a year  ago, marketing them first to employees and through billing inserts to customers  before advertising in newspapers, Heffernan said. The amount of debt outstanding  through the program increased 59 percent to $126 million as of March 31.

While the investments let investors write checks against them and access the  money daily, they aren’t insured by the Federal Deposit Insurance Corp. against  losses and there are restrictions. The notes, unlike traditional bonds, don’t  have stated maturity dates and aren’t tradable in a secondary market.

People “tend to use it like a savings account or a money-market account,” Brad  Reynolds, chief investment officer for LJPR  LLC, said of Ford Credit’s Interest Advantage notes. Investors who are also  employees of the companies may be inadequately diversified if there are credit  problems with the issuers, said Troy, Michigan-based Reynolds.

Duke Energy and GE Capital both said they are transparent about how the  products work and that it’s the responsibility of individuals to determine what  investments are right for them.

Ford Credit, a unit of the Dearborn, Michigan-based automaker, prominently  discloses how its notes differ from bank accounts or other guaranteed products,  said spokeswoman Margaret  Mellott. The company had about $4.7 billion outstanding in its demand notes  at the end of 2011.

Duke Energy and GE Capital have internal committees that can reset the rates  paid on the accounts weekly. Ford Credit updates the rates weekly to reflect  money-market rates plus 25 basis points and may pay greater than that “at its  sole discretion,” according to the notes’ prospectus.

Duke Energy currently pays investors 1.2 percent for accounts less than  $10,000 and as much as 1.6 percent for those with more than $50,000. GE Capital  and Ford Credit paid a rate of 1 percent for investments of less than $15,000  and as much as 1.1 percent on amounts greater than $50,000 as of June 4.

Bloomberg News

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