Fixed Income

Fixed income securities are debt instruments issued by:

·        the government

·        the corporations

·        the local governments

·        other entities to expand or finance their operations

With fixed income securities, investors can take advantage of gaining periodic interest payments and the return of principal upon maturity. By investing in these securities, an investor lends money to the issuer.

Fixed income securities include:

·        bonds

·        savings bonds

·        Guaranteed Investment Certificates (GICs)

·        Treasury Bills

·        Bankers’ Acceptances

·        NHA Mortgage-Backed Securities (MBS)

·        Strip Coupons and Residuals

Both individual investors and institutional investors invest in fixed income securities to diversify their portfolios. Many investors, particularly retirees, prefer fixed income securities such as bonds as a guaranteed return on investment.

The major advantage is that the investors know when and how much they will get upon the maturity period. It is important that they hold the securities until the maturity period. As the bond price fluctuates based upon interest and inflation rates, understand that premature calling by an investor can lead to losses.

Coupon and zero coupon bonds are the simplest forms of fixed income securities. Coupon bonds are the ones that offer interest income on a periodical basis. The principal will be paid back by the lender upon maturity. In case of zero coupon bonds, the issuer does not offer an interest income but is more likely to sell bonds at below par and pay the investors upon maturity at par or face value.

The difference between the amount you paid and the total amount you receive at the end of the maturity period is your profit. For regular income spanning several years, opt for coupon bonds. For a long term purpose such as funding your kid’s college education after 15 years, opt for zero coupon bonds.

Credit rating agencies such as Standard & Poor and Fitch and Moody’s study the financial details of the issuers of these fixed income securities such as bonds and give rating from AAA to D. These credit ratings play a crucial role in determining the initial yield of the bond and bond prices. The credit risks will be high if the rating is low and vice versa. The important thing is to choose a particular type of fixed income security that is aligned with your investment objectives.