Fixed Income

Investors of all types are concerned about holding an investment portfolio that balances risk, return, and the amount of risk required to achieve a specific return.  Of course everyone wants to achieve the highest returns possible, but history and theory confirm that achieving a higher return requires you to take higher risk.  Fixed-income securities are a less volatile asset class and therefore provide a reduction in volatility to your portfolio and provide balance to high-risk equity securities.

Fixed-income securities are less volatile because the amount of income generated by this type of investment each year is "fixed," or set when the security is issued. No matter what happens or who holds a fixed-income investment, it will generate exactly the same amount of money stated in its terms and will be redeemed for its face value.  The predictability in cash flow of a fixed-income investment provides more certainty to investors than stock dividends, which are not contracted.  Obviously, a fixed-income security like a bond is quite different from an investment in a stock. 

Fixed-income securities include:

• Mortgage-backed securities (MBS)--a bond that is backed by the cash flow generated from homeowners' mortgage payments. Prepayment or redemption risk is an additional risk not found in traditional bonds.
• Corporate bonds--issued by a private corporation who "borrows" the face amount of the bond from an investor and pays interest on that debt while it is outstanding, and then "redeems" the bond by paying back the debt.
• Treasury securities--issued by the U.S. government including a variety of different lengths of time until maturity (3 months to 30 years). Various types of Treasuries include Treasury notes, bills, and bonds. Treasuries are guaranteed by the U.S. government and are free of state and local taxes on the interest they pay
• Municipal bonds--issued by state and local governments to pay for government projects including schools, highways, hospitals, housing, sewer systems and other important public projects.
• Certificates of deposit (CDs)--issued by banks, thrift institutions, and credit unions in return for deposited funds.  These deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. CDs have a specific, fixed term--often three months, six months, or one to five years--and, usually, a fixed interest rate.
• Annuities--any stream of fixed payments over a specified period of time, typically issued by insurance companies in exchange for premiums.
• Exchange-traded funds (ETFs)--a special type of mutual fund designed to track the performance of a specific bond market index. Prices of fixed income ETF shares are affected by the same factors that influence bond prices.  Common brand names for ETFs include iShares, SPDRs, Diamonds and Vipers.

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