A non-cumulative fixed income security is one for which the holders rights to a coupon are lost if it is skipped (not paid) under the terms of the prospectus. For example, the issuer may have insufficient distributable reserves in a particular year to pay a dividend on its preference shares.

A cumulative fixed income security is one for which any skipped coupons are accumulated to be paid in the future. Often accumulated coupons will bear interest at a rate set out in the prospectus.

There is a grey area between non-cumulative and cumulative securities insofar as some ‘non-cumulative’ securities have a ACSM (alternative coupon settlement mechanism). This means that if the issuer is unable to pay a particular coupon in cash it must satisfy it in an alternative way as specified in the prospectus. The alternative is usually the issue of shares to the value of the skipped coupon(s).