Dispelling the myths about fixed income

September 6, 2017

facts about fixed income

Fixed income investing seems straightforward. But here are five reasons why working with financial professionals makes sense.

When interest rates go up, bond prices go down

If interest rates go up, investors access a bond with a higher interest payment – the attractiveness (and value) of the bond with the lower interest rate goes down.

Fixed Income fixed

A fixed income security is one where the issuer must make payments on a schedule. The most common type of fixed income investments are bonds – but other investments can be considered fixed income, including:

Preferred shares

shares that pay out a regular dividend

Mortgage-backed securities

an investment with a monthly payment consisting of a blend of principal and interest payments from a pool of mortgages

Floating rate loans

loans made by major banks to prominent companies

Not all of these options pay a fixed amount on a fixed schedule

Your investment is not guaranteed

Although not as volatile as equities, fixed income investments can experience price fluctuations with longer-term bonds being especially susceptible to the risk of rising interest rates and potentially delivering negative returns.

Return expectations with
a 1% interest rate hike

Fixed income investments are not all equal

Fixed income investments are also subject to default risk – the risk that an issuer will fail to pay the interest due or repay the principal. This default risk is conveyed through its credit rating – for example, those with a AAA credit rating are considered less risky than those rated B.

Currency matters

Currency risk can occur if you own an investment that is denominated in a currency other than your own. Any changes in the exchange rate will cause that investment’s value to either decrease or increase when converted back to your currency.

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