Fixed Income 101
By Synergy Capital Solutions on May 28, 2024
Fixed income investments offer a vast array of financial tools that can bring stability and income potential to your investment strategy. Understanding these assets is crucial for building a balanced portfolio.
What is fixed income?
Think of fixed income investments as loans you make to borrowers, like governments or companies. In return for your loan, they pay you regular interest (coupons) and return your money (principal) when the loan ends. This gives you a predictable stream of income and your money back on a set date.
Key Terms:
- Coupon: The interest rate the borrower promises to pay you.
- Maturity: The date when the loan ends and you get your principal (what you put into it) back.
- Price: The current market value of the loan, or what you could buy/sell it for.
- Yield: The expected annual return on the loan, considering purchase price, interest payments, and getting the
principal back.
What to Consider:
- Strengths: Fixed income investments offer a reliable stream of income through regular interest payments. This
helps with budgeting and financial planning, especially for retirees relying on investment income. Also, fixed
income acts as a hedge against market volatility. When stocks experience downturns, fixed-income investments
typically hold their value better, providing portfolio diversification. - Drawback: When investing in a fixed income portfolio, several considerations must be made, including
acknowledging inherent risks. Among these risks, credit risk, which involves the possibility of an issuer defaulting
on payments that can lead to reduced income or even loss of principal for investors. Additionally, reinvestment risk
should be considered, as it pertains to uncertainties on reinvesting future cash flows at comparable rates when
current investments mature.
Examples of Fixed Income Products:
- Corporate Bonds: Issued by companies with rates varying based on financial stability.
- Municipal Bonds: Issued by local governments, often providing tax benefits.
- Treasury Securities: These include T-bills, notes, and bonds, which vary in maturities and interest structures.
Fixed income can be a reliable cornerstone of your portfolio, providing steady income and stability. Depending on the investment, it can also offer growth potential.
To create a personalized investment strategy that considers your risk tolerance and current market conditions, speak to one of our advisors at Synergy Capital Solutions. We can help you navigate the different fixed income options and ensure they align with your overall financial goals.
