Providing investors with ways to achieve a diversified portfolio while offering a secure, low-risk way to generate a steady flow of income.
Fixed-income securities are debt instruments issued by a government, corporation or other entity to finance and expand their operations. They provide investors a return in the form of fixed periodic payments and the eventual return of principal at maturity.
Examples of fixed-income securities include bonds, treasury bills, Guaranteed Investment Certificates (GICs), mortgages or preferred shares, all of which represent a loan by the investor to the issuer.
These debt instruments comprise ways to achieve a diversified portfolio. For many investors, particularly retirees, fixed-income investments are a secure, low-risk way to generate a steady flow of income. In most cases, as long as they’re held to maturity, these types of debt instruments will provide a guaranteed return on your investment because the payments of fixed-income securities are known in advance.
Here’s a list of some common fixed-income securities and how they work:
A bond is an obligation or loan made by an investor to an issuer (e.g. a government or a company). In turn, the issuer promises to repay the bond’s principal (or face value) on fixed maturity date and to make regularly scheduled interest payments (usually every six months). Governments and corporations issue most bonds.
Savings bonds issued by the Canadian government and various provincial governments are different from conventional bonds. For many years, Canada Savings Bonds (CSBs) were a safe investment vehicle that provided Canadians with a guaranteed rate of return. Although no longer available for purchase, CSBs typically paid a minimum guaranteed interest rate (compound interest bonds also were available), carried no fees and could be cashed at any time. It is important to note any outstanding CSBs reached maturity and stopped earning interest in December 2021—now is the time to redeem them at your local bank branches. Banks will pay the face value, plus any accumulated interest, in cash or as a deposit into your bank account.
GICs are notes issued by a trust company with a fixed yield and term. The Canada Deposit Insurance Corporation (CDIC) insures many GICs for interest and principal totaling up to $100,000. These are generally non-redeemable before their term is complete.
Treasury bills (T-bills) are the safest type of short-term debt instrument issued by a federal government. Ideal for investors seeking a one- to 12-month investment period, T-bills are highly liquid. T-bills are considered very secure, in comparison to other fixed-income securities, because they’re backed by the government.
BAs are short-term promissory notes issued by a corporation bearing the unconditional guarantee (acceptance) of a major chartered bank. BAs offer yields superior to T-bills, and a higher quality and liquidity than most commercial paper issues. Commercial paper is an unsecured debt instrument typically issued for the financing of a firm’s short-term liabilities.
A National Housing Act (NHA) MBS is an investment that combines the features of residential mortgages and Canadian government bonds. MBS investors receive monthly income consisting of a blend of principal and interest payments from a pool of mortgages.
Strip coupons and residuals are instruments purchased at a discount that mature at par (100)—”at par” means at face value. They grow over time and while any interest income is not payable until maturity, a nominal amount of interest may accrue each year. The purchaser is then required to claim the accrued interest as income for tax purposes. For example, say an investor currently holds a bond whose par value is $100. The bond is currently priced at a discount of $95.92, matures in 30 months, and pays a semi-annual coupon of five percent. Therefore, the current yield of the bond is (five percent coupon x $100 par value)/$95.92 market price = 5.21 percent. The difference between the purchase price and 100 is interest income. Strip coupons generally offer higher yields and can also fluctuate more than the price of a bond of similar terms and credit quality. All of the aforementioned features make strip coupons a popular choice for tax-sheltered accounts such as Registered Retirement Savings Plans (RRSPs) and registered retirement income funds (RRIFs).
A laddered portfolio is an investment strategy that involves buying bonds with different maturity dates. This way, an investor can respond to changes in interest rates in a relatively quick manner. Each position in the portfolio is usually the same size as the next with roughly equal intervals between maturity dates. A laddered portfolio enables the spread of reinvestment risk over the long term, helping to average out the effects of overall interest rate changes.
In Quebec, financial planning services are provided by RBC Wealth Management Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.
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