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Fixed-Income Investments
Types of Fixed-Income Investments
There are a large number of fixed-income investments, each with different structures and issuers. Below are some examples:
BondsCertificates of deposit
Agency mortgage-backed securities
Bonds
Bonds are loans made by the investor to the issuer. It's a way for a government, corporation or other entity to borrow money and pay it back with interest at a specified future date. Some types of bonds include:
• Corporate bonds. Bonds issued by corporations to raise capital. They're generally available in $1,000 increments and pay semiannual interest to the bondholder.
• Municipal bonds. Bonds issued by a state or local government. Interest paid on these bonds is usually free from federal, and sometimes state and local, taxes. Certain bonds may be subject to the alternative minimum tax (AMT).
• Treasuries. Loans made to the federal government. Below are three main types of Treasuries. Their main difference is in the length of maturity:
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• Treasury bills (T-bills) are sold at a discount from face value, offer no interest payments and are paid back at face value at maturity, which ranges between 91 days and one year.
• Treasury notes offer fixed interest payments and are paid back at face value at maturity, which ranges from one to 10 years.
• Treasury bonds offer fixed interest payments and are paid back at face value upon maturity, which is 10 years or longer.
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• Zero coupon bonds. Some government, municipal and corporate bonds are issued in the form of zero coupon bonds. You buy a zero coupon bond at a discount from face value, and when the bond matures, you're paid its full face value. You do not receive interest payments.
Certificates of Deposit
Certificates of deposits (CDs) are time-deposit investments issued by a bank or savings and loan with a stated interest rate and date of maturity (anywhere from three months to six years). CDs typically offer higher rates of return than most comparable investments. However, removing your money before maturity will result in a penalty.
Agency Mortgage-Backed Securities
Agency mortgage-backed securities are issued by U.S. government agencies or government-sponsored enterprises (GSE). These securities are backed by the full faith and credit of the U.S. government or by a GSE that has the implied, but not direct, support of the federal government.
One common type of mortgage security, a mortgage pass-through, is created by pooling mortgages and converting the pool into bonds that represent partial ownership in the underlying mortgages. Investors receive a monthly payment over the life of the investment consisting of an interest payment, the scheduled repayment of principal and any additional repayments made on the underlying mortgages in the pool. Keep in mind that the investment may be returned before maturity and with a reduced yield if the underlying mortgages are paid off early.
For More Information
Contact your Financial Advisor if any of these investments interest you or if you'd like more information about how fixed-income investments work and the role they can play in your investment portfolio.