Fixed-income investments are securities that provide regular interest or dividend payments and, in many cases, a return of principal at maturity.
Fixed-income investments are securities that provide regular interest or dividend payments and, in many cases, a return of principal at maturity. Their primary objective is income with limited, if any, growth potential. Remember, the rate of return on a fixed-income investment can be fixed throughout its holding period (e.g., bonds) or can fluctuate with the general movement of interest rates (e.g., Series EE U.S. savings bonds and money market mutual funds). A good example of a variable interest rate is the money market account that you may have.
Fixed-income investments, in general, are “loanership” assets; investors loan their money to a government entity (e.g., state), corporation, or financial institution (e.g., bank, credit union) and receive interest on a regular basis (e.g., monthly, semi-annually). The rate of interest paid can either be fixed for the life of an investment (e.g., Treasury securities) or can fluctuate with the general movement of interest rates (e.g., series EE savings bonds). The principal (amount of original investment) is returned at maturity (the date on which principal must be repaid), although its value can fluctuate (if sold beforehand) according to changes in interest rates. For many fixed-income securities (e.g., bonds), as interest rates rise, asset prices decline and, as interest rates decline, asset prices rise.
Fixed-income investments provide a level of safety and comfort that is just not available in other investment securities such as stocks. However, Most fixed-income investments, including all marketable U.S. Treasury securities purchased since late 1998, require a minimum purchase of $1,000 but it even with these restrictions, it is now more affordable to small investors. Formerly, $10,000 was required to purchase Treasury bills and $5,000 for Treasury notes with less than a 5-year maturity. Treasury bills are issued with maturities of 3 and 6 months and Treasury notes with maturities of 2, 5 and 10 years. All Treasury securities are backed by the “full faith and credit” of the U.S. government and can be sold prior to maturity in secondary markets.
Periodic government Treasury auctions determine the interest rate earned by investors. Generally, the longer the maturity date, the higher the rate of interest a Treasury security (and all bonds) pay, because an investor’s money is “tied up” (subject to interest rate fluctuations and unavailable to invest elsewhere) for a longer period of time. If you watch any financial news or read any financial publication, you probably have heard of 5 or 10 years treasury yields.
One of the most important features of treasury securities is that interest earned is exempt from state and local income taxes. Another characteristic is that, like all bonds, Treasuries are subject to interest rate risk (when interest rates rise, bond prices decrease and vice versa). Treasury securities can be purchased from your local bank or your brokerage firm(local or online) for a fee or you can directly purchase them from the Federal Reserve System’s “Treasury Direct” program at no charge. For additional information, go to the Treasury Direct website.