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Understanding Fixed Income Investments

When building an investment portfolio, you will consider cash, fixed investments and equity investments. Fixed investments refer to income investments which are loans made to the underlying organization who agrees to pay you a fixed amount of interest over time. If you have an interest bearing savings account, you are already leveraging this type of investment. Your bank or financial institution is paying you interest in return for placing your funds into their account. Most fixed investments refer to bonds, loans made to an issuer such as the U.S. government or a corporation.

Fixed investments play an important role in a retiree’s portfolio as they can create a current income stream which can be utilized to cover household expenditures, and they can provide an offset to volatility experienced within an investment portfolio from equity investments. Bonds typically provide interest payments over a long period of time, and as such, generally offer a lower return than equity investments.
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Fixed Income Risk

Even though bonds may not be subject to market risk in the same fashion as equity investments, they still have associated investment risk. The primary forms of risk in which a potential investor should consider include:
•
 Interest Rate Risk- When interest rates decrease, the value of fixed securities will increase and vice versa.
•
 Equity Risk- Equity risk reflects the value of your investment.
•
 Default Risk- There is the risk that the underlying corporation could default on their financial obligation to repay the debt.
•
 Purchasing Power Risk- Inflation could erode your real return.
•
 Call Risk- A callable security is one in which the underlying organization could require to be returned by the bondholder in order to potentially offer the bond to new investors at a lower interest rate.

 

Primary Fixed Investment Types

There are a variety of fixed investments to choose from for your investment portfolio, including:
•
 U.S. Government Securities- These are considered to be the safest form of debt in circulation as they are backed by the U.S. government.
•
 U.S. Treasury Bills- These typically offer maturities of 3 or 6 months and do not pay interest, but are offered at a discounted purchase price.
•
 U.S. Treasury Notes- These are direct obligations of the U.S. government and are offered with maturities ranging from 1-10 years. T-notes pay interest on a semi-annual basis.
•
 U.S. Treasury Bonds- These are also direct obligations of the U.S. government, offer semi-annual interest payments and are offered in maturities of 10-30 years.
•
 Federal Land Banks- These are loans offered to farmers and ranchers, supervised by the Farm Credit Association.

Municipal Bonds- Government entities issue municipal bonds as the funds are needed for general financing requirements or to fund a special project. These bonds are offered free from federal, local and state income tax.

Corporate Bonds- Individual corporations can also issue bonds, often paying a higher interest rate than either government securities or municipal bonds, but they also are often associated with a higher risk.

These are only a few brief descriptions of fixed income options available to investors. Be sure to carefully consider not only choosing the percentage of your portfolio to invest into fixed securities, but which type of fixed assets to allocate your capital across.


Fixed Income Investments, investment portfolio, Fixed investments, equity investments, Fixed Income Risk, Interest Rate Risk, Equity risk, Default Risk, Purchasing Power Risk, Call Risk, Primary Fixed Investment, U.S. Government Securities, U.S. Treasury Bills, U.S. Treasury Notes, U.S. Treasury Bonds, Federal Land Banks, Municipal Bonds, Corporate Bonds, fixed income options




Fixed Income Investments, investment portfolio, Fixed investments, equity investments, Fixed Income Risk, Interest Rate Risk, Equity risk, Default Risk, Purchasing Power Risk, Call Risk, Primary Fixed Investment, U.S. Government Securities, U.S. Treasury Bills, U.S. Treasury Notes, U.S. Treasury Bonds, Federal Land Banks, Municipal Bonds, Corporate Bonds, fixed income options

When selecting a financial advisor, remember that the decision is an important one. To ensure that you hire someone who is a great match for you, proactively work to avoid the common mistakes listed above.