Fixed Income

Fixed income products are mainly Investment Bonds which are debt instruments.

The fixed income investments are dominated by corporations and governments.

Both entities use investment bonds as a way to borrow money. The reasons they borrow the money are as numerous as there are corporations and governments.

They come in several versions:

• Municipal
• Provincial
• Mortgage
• Collateral Trust
• Corporate
• And many more.

This paper is backed up with real assets. They pay fixed amounts of interest income and have firm maturity dates.

If an issuer fails to make the interest payments or redeem the Bond at Maturity. The holder of the Bond has the right to go after the underlying assets of the Corporation.

A Debenture is similar except it is only backed up by the issuing entity’s "promise to pay".

Many municipalities use an Installment Debenture to finance building rebuilding or repair of infrastructure. These have a laddered redemption process.

Example A Debenture issued at $1,000,000 with 10% or $100,000 maturing each year for 10 years. The municipality gets the $1,000,000, but only has to paid back the investors $100,000 per year plus interest of course. It’s mainly Municipalities that issue Debentures, because they can increase Taxes to pay back investors.

Some of these issues allow you the option of converting to common-shares-equity in a Corporation.

One popular type is the Strip Coupon Bond.

I has has two parts, face value, and the interest stream or coupons.

In a Strip Coupon, the two parts are separated and sold separately at a discount. The bond portion is held to maturity and redeemed for full face value. Creating a capital gain, which is tax efficient.

The coupon Income stream is sold at discount which makes it attractive for the buyer as a fixed term guaranteed payment stream.

Fixed income investments is a huge market. Many of the products are bought and sold by Financial Institutions, Insurance companies, and Pension funds, because of this it is extremely important to know the product is a bona-fide investment.

To examine issuers there are Rating Services available.

These entities rate the quality of product available for sale.

The rating system is straight forward with:

• A++, The highest rating - only the best companies get this rating.
• A+, Still the best companies, but without quite as much asset backing available.
• A, Still good quality companies, but ones that are exposed to the effects of adverse economic conditions.
• B++, A not bad company, but adverse economic conditions could cause problems down the road.
• B+, Company is doing well now, but may not be able to sustain its growth and returns.
• B Company has a history of volatile performance.
• C Company may or may not be able to cover interest and redemption's.
• D The company has defaulted on its payments.
• Rating Suspended - great uncertainty as to whether company can pay its debts.

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The information provided here is from chapter 5 of the Canadian Securities Course Text book. This information is not investment advice and should not be looked at as such. If fixed income products are your thing talk to your Financial Planner or Stock Broker.