Fixed income investments are typically held by retirees preserving their income or people with short-term savings goals. While the term “fixed income” gives many the impression that the investments are safer than most, it does not imply they are risk-free. A fixed income portfolio is typically heavy on bonds rather than stock, but different bonds have different considerations.
Corporate Bonds
Corporate bonds let investors fund company projects or general obligations without buying a share of ownership. The investor accepts the risk that their activities will be profitable and yield the promised return. Corporate bond yields also tend to be sensitive to market interest rates. Further, if the company defaults, the investor may lose the principal.
Municipal Bonds
Municipal bonds, called “munis,” are issued by entities like non-profits or local governments to fund their activities, such as roads and schools. The investor accepts the risk that the activities are profitable and the entity’s credit rating reflects that it might repay as promised.
Typically, munis are exempt from federal income taxes but yield less than corporate bonds. Therefore, the investor also accepts the calculated risk that the yield on a similar corporate bond is depleted by the tax, making the muni more advantageous.
High-Yield Bonds
All bonds with a “high-yield” designation have a special term: junk bonds. Junk bonds are labeled as such because they have a low reputation among major rating agencies, such as Standard & Poor’s and Moody’s. Investors in junk bonds should be aware of their elevated risk before buying them.
U.S. Treasury Securities
Treasuries invest in the activities of the U.S. Department of the Treasury. Because they are backed by the “full faith and credit” of the federal government, they present only negligible risk. Yields are offered as short as 1 month and as long as 30 years, accommodating a wide range of investor needs.
Managing Cash with Treasuries
First State has over 50 years of meeting client growth objectives and uses Treasuries to manage cash and short-term growth. For a free consultation, contact the expert Tulsa financial advisors at 918-492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.