Broker Check

Investment Education

Taxable Fixed Income

Taxable Fixed Income Securities such as bonds or CD’s generate a fixed rate of interest over a specified duration of time. The interest received by the investor is taxed at their current tax bracket. For the most part, taxable fixed income securities are liquid and can be sold at any time prior to maturity. A profit or loss may be incurred by the seller if sold prior to maturity. The gain or loss would be contingent on the level of interest rates relative to when the securities were purchased.

Government Bonds

Government bonds are any debt instrument issued directly by a government. Government bonds, such as U.S. Savings bonds (EE Bonds)*, are backed by the full faith and credit of their treasury department. Government Bonds are completely negotiable and can be bought and sold on a daily basis. U.S. Savings bonds, however, are not negotiable. Lending to a national government in the country’s own sovereign currency, government bonds are generally free of credit risk, because the government can raise taxes or simply print more money to redeem the bond at maturity. But this does not mean risk-free. A profit or loss may be incurred by the seller if sold prior to maturity. The gain or loss would be contingent on the level of interest rates relative to when the securities were purchased.

*Political uncertainty can have an effect on the creditworthiness of an individual country's ability to pay off their debt. (10/11, e.g. Greece and Italy)

Corporate Bonds

Corporate Bond Debt securities are issued by a for-profit company instead of a government. Corporate bonds are a major way companies raise funds for their operations or for a specific project. The risk of a corporate bond for a bondholder depends on the creditworthiness of the issuing company. Generally, the higher the creditworthiness of the company, the lower the interest rate paid on the bond. This is because of a greater likelihood of the company being able to repay the bond holder’s principal at maturity. They also usually have a stated coupon rate. Corporate bonds are taxable. A profit or loss may be incurred by the seller if sold prior to maturity. The gain or loss would be contingent on the level of interest rates relative to when the securities were purchased.

High Yield Bonds

High Yield Bonds are a debt security issued by a corporation with a below investment grade credit rating. Bonds rated less than Baa3 by Moody’s or BBB- by S&P or Fitch are considered high yield bonds. They have higher yields because they have a higher risk of default on the part of the issuer. High yield bonds are considered sufficiently high risk that the law does not allow banks to invest in them. They are also called low-grade bonds, informally, junk bonds. The volatility of junk bonds is contingent on interest rates as well as the issuing companies changing fundamentals. High yield bonds generally should be part of a diversified portfolio for sophisticated investors.

Foreign Bonds

Foreign bonds are a debt security issued by a borrower from outside the country in whose currency the bond is denominated and in which the bond is sold. A bond denominated in U.S. dollars that is issued in the United States by the government of Canada is a foreign bond. As with all bonds, foreign bonds have a maturity, at which time the principal is to be repaid to bondholders. They also usually have a stated coupon rate. The rate of interest paid is contingent on the issuing country’s economy and overall creditworthiness. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

Mortgage-Backed Bonds

A mortgage-backed bond is a long-term bond secured by the payments on one or more mortgages. For example, a mortgage corporation may issue a bond backed by payments it receives from clients. This provides the issuer with working capital while providing a current income stream for bondholders. In the event of default, bondholders have the right to take possession of and sell the property underlying the mortgage in order to recover their investments. There is a risk that if the value of the real estate falls below the amount of the mortgage, then the bondholder could conceivably lose a considerable portion of their principal. Like all bonds they usually have a stated coupon rate. Mortgage-backed bonds are taxable. A profit or loss may also be incurred by the seller if sold prior to maturity. The gain or loss would be contingent on the level of interest rates relative to when the bonds were purchased. Mortgage-backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

CD's

CD’s are Certificates of Deposit at a bank or other financial institution that has a fixed return (usually via an interest rate) and a set maturity. The depositor may or may not access the funds if held to maturity in a certificate of deposit until maturity. CD’s are insured by the FDIC up to a $250,000 including interest payments.

Preferred Stock

Preferred stock is a security that shows ownership in a corporation and gives the holder a claim, prior to the claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Most preferred stocks pay a fixed dividend that is paid prior to the common stock dividend, stated maturity in a dollar amount or as a percentage of par value. This stock does not usually carry voting rights. Preferred stock has characteristics of both common stock and debt. A profit or loss may be incurred by the seller if sold prior to maturity. The gain or loss would be contingent on the level of interest rates relative to when the securities were purchased. There also may be credit risk associated with the issuing company.

Investment Education