|
|
|
|
|
|
Fixed Income Investment Basics
A fixed income investment product refers to any type of investment that yields a regular (or fixed) return, such as bonds. This can be contrasted with variable return investment products, which yield an irregular (or variable) return, such as stocks. |
|
|
|
|
Corporate Bond
A corporate bond is a bond issued by a corporation in order to raise capital. They are an alternative to issuing new shares on the stock market (equity finance), and are a form of debt finance. The term corporate bond is usually applied to longer term debt instruments, generally maturing at least 12 months after their issue date.
A bond is basically an IOU - a promise by the corporation to pay back your original investment (the "principal") at a maturity date, plus interest payments (the "yield" or "coupon") at regular intervals. Corporate bonds are often listed on major exchanges (such bonds being described as "listed" bonds), where they can be bought and sold before maturing, where its value rises and falls with interest rate changes and the risk of default. Bonds Relative to government bonds, they typically have a higher risk of default, depending on the corporation and the government issuing the bonds. For private investors, the safest way to invest in corporate bonds is through corporate bond funds.
U.S. Treasury
A U.S. Treasury is a bond issued by the U.S. government to raise capital. They are a form of debt finance, and operate similar to corporate bonds. There are three primary types of U.S. Treasuries: a Treasury bill (or "T-bill"); a Treasury note (or "T-note"); and a Treasury bond (or "T-bond", or the "long bond").
The Treasury bill is a short term fixed income security with a minimum denomination of $10,000. They have a maturity of 28 days (one month), 91 days (three months), 182 days (six months), and one year. They are a zero-coupon bond in that they do not pay interest prior to maturity. Instead they are issue at a discount of the par face value to create a positive yield to maturity. T-bills are generally considered to be the most risk-free investment product. They are quoted for purchase and sale in the secondary market.
The Treasury note is a medium term fixed income security with a minimum denomination of $1,000. They have a maturity of one to ten years. They have a coupon payment every six months. They are quoted for purchase and sale in the secondary market.
The Treasury bond is a long term fixed income security with a minimum denomination of $1,000. They have a maturity of ten to thirty years. They have a coupon payment every six months. They are quoted for purchase and sale in the secondary market.
Municipal Bond
A Municipal bond is a bond issued by a state, city, or other local government, or their agencies, to raise capital. Some entities that issue municipal bonds are counties, school districts, publicly owned airports, and any other government entity below the state level. Municipal bonds are often issued to pay for special projects, such as highways and sports stadiums. In some cases, interest income received by municipal bond holders is exempt from federal and state income taxes.
Junk Bond
A Junk bond, or "high yield bond", is a bond that is rated below investment grade, meaning it has a higher risk of defaulting. Junk bonds typically have a credit rating of BB and below. Because of the increase risk of default, they pay higher yields in order to make them attractive to investors. Unlike most investment grade bonds, high yield bonds lack "maintenance" covenants. Instead, they use "incurrence" covenants, where default occurs if the borrow undertakes a prohibited transaction, like borrowing more money when it lacks the cash flow to pay the interest.
Agency Securities
Agency securities are usually bonds issued by a U.S. government-sponsored agency, while not being guaranteed by the government (since the agency is a private entity). Some prominent issues of agency securities are Sallie Mae, Fannie Mae, Freddie Mac. Agency securities are usually exempt from state and local taxes, but not federal tax.
Mortgage-Backed Security
A mortgage-backed security is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. Payments are typically made monthly over the lifetime of the underlying loans. Because of curtailment and prepayment options on mortgages, the monthly cash flows are not known in advance. |
|
|
|
|
|
|
