Fixed Income Securities
Fixed income security investing is appropriate for
those seeking safe and steady returns. Here is a look
at some common types of fixed income securities.
A fixed income security is one that pays a fixed-interest rate for a certain period of time because the
underlying security has a fixed-rate. By contrast, variable-income has a fluctuating payment for a period
of time, based on changes in that underlying securities interest rate. A fixed-rate government bond is a
type of fixed income security.
Types of Fixed Income Securities
There are several different types of fixed income securities:
Municipal bonds are offered by government entities. Some municipal bonds are tax-exempt while others
are tax-free (you don’t pay any tax on the interest payments).
U.S. Treasury bonds are considered to be the safest type of investment of anything else. However, they
also have the lowest yield of almost any other type of investment. The U.S. Treasury offers bonds in
varying maturities. Bills mature in a year or less. Notes mature between two and ten years. Bonds mature
at some point after ten years.
Certificates of Deposit (CD) are a type of deposit account that pays interest on your deposit, but only if
you leave your money in the account for a specific amount of time. If you withdraw your money from the
CD before the maturity date, you could forfeit the interest you’ve earned and face an early withdrawal
Agency Bonds are issued by government agencies and government-sponsored entities which are
private companies that have been given a government charter because of the types of financial services
they provide. This includes entities like Sallie Mae, Fannie Mae, and Freddie Mac. These bonds are
safer than many other types of investments, but aren’t considered quite as safe as the ones issued by the
U.S. Treasury. They also have yields that are slightly higher than U.S. Treasury bonds.
Corporate Bonds are offered by corporations trying to raise money for various projects. These may offer
higher yields than that of government issued bonds, as they can’t provide the same security that can be
offered by the government.
Callable Bonds can be redeemed by the issuer at a
certain point before the maturity date. The problem with a
callable bond is that the issuer may redeem your bond
before all the interest you expected has been paid out.
Since bonds are often called once interest rates drop,
you probably wouldn’t be able to reinvest your money in
another bond paying the same interest rate.
Bonds may be investment-grade bonds issued by
corporations who are in good financial condition based
on assessment by the major credit rating agencies.
Bonds that are below investment-grade are known as
junk bonds or high yield bonds. These bonds pay a higher
interest rate, but have a higher risk of default since the
corporation has a low credit rating.
Choosing a Fixed Income Security
When you’re choosing a fixed rate bond security, one of the most important factors will be the interest
rate or yield. The interest rate directly impacts the payments you receive on the security. Several things
influence interest rate like the entity’s credit rating and market factors. Generally, the safer the security,
the lower the interest rate and therefore, the lower the payments will be. Higher-risk securities pay higher
interest rates, but there’s a risk that you’ll lose your entire investment if the entity gets liquidated.
Since credit rating has a big impact on the amount of interest you’re paid and the likelihood that your
security will endure until maturity, credit rating is another important factor to check out before you invest in
Tax implications might be a concern. Certain types of interest payments from fixed income securities are
exempt from Federal and state states, some may be only subject to Federal taxes, and some may be
exempt from all taxes. Consult with a tax professional to understand how your interest payments will
affect your taxable income.
When you’re investing in a certificate of deposit, you should make sure you’re investing in account that’s
with an FDIC insured bank. This guarantees that your deposit will be covered, up to $250,000, by the
Federal government if the financial institution goes out of business.
The amount of fixed income securities you have in your portfolio depends on your tolerance for risk, your
investment goals, and the time until you retire.
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