Why Would I Want To Own Bonds & Fixed Income?

You want to own bonds & fixed income securities for protection and stability of your portfolio. These are designed to generate income from the principal that you invest into them. A bond is essentially a loan to whomever is issuing it. The issuers of these securities have to pay you a fixed interest rate each year, and then give you your principal investment back at the end of its maturity. These securities are also referred to as NOTES, and they come in many shapes and sizes.

Treasury Notes & Bonds These are issued by the U.S Government and are considered to be some of the safest types of investments you can possibly own. These have the full faith and credit of the Federal government backing them. If treasuries ever default, or fail to pay their interest, we're in BIG trouble! Treasuries can range in maturity from a few months to 30 years. In general, the longer the maturity, the higher the rate of interest it pays you.

Corporate Notes Corporations will raise money to use for various aspects of business by issuing these securities. Again, this is a loan that they are taking from you, the buyer of the bond. You are lending them your money to use for whatever they see fit. They will pay you a rate of interest each year, and then give you money back at the end. Corporations have credit ratings just like people do. The ratings agencies like Standard & Poors or Moody's rate companies on their financial strength. The stronger they are financially, the better their rating will be. Companies with higher ratings don't have to pay as much interest on their notes. Companies with bad credit and poor ratings will pay much higher interest rates to their bondholders. If a company goes out of business or declares bankruptcy, the bondholders may get some of their money back. It is very common though that corporate notes can become worthless when a company goes under.

Agency Securities These are securities issued by government-sponsored-entities (GSE's) and federally related institutions. These include agencies like Federal National Mortgage Association (FNMA, or Fannie Mae), Federal Home Loan Bank, Federal Farm Credit Bank System, Farm Credit Financial Assistance Corporation, Federal Home Loan Mortgage Corp, Student Loan Marketing Assoc(SLMA)., etc. These types of notes have very high credit ratings, but they are not technically government backed. They have the implied backing of the Federal government. These institutions are privately owned, and publicly traded entities created to reduce borrowing costs for certain sectors of the economy such as farmers, homeowners and students.

CD's This is a very safe security issued by a bank that usually pays interest. They can come in denominations as low as $100, and range in maturity from a few weeks to several years. Interest rates are set by competitive forces in the marketplace. If you redeem your CD early, there are usually penalties and you will lose some of the interest you have earned. CD's are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per account. This is a federal agency established in 1933 that guarantees funds on deposit with member banks.

Money Markets These are a popular type of short-term instrument, most often purchased through a money market mutual fund. These funds will invest the investors money into commercial paper, banker's acceptances, repurchase agreements, government securities, CD's, and other highly liquid and safe securities. Money markets pay a fixed interest rate to the investor that is usually higher than savings accounts. Money market mutual funds are not generally insured or guaranteed to maintain a certain value. However, most money market mutual funds try to maintain a $1 per share value at all times.

Bonds Have Inverse Relationship To Interest Rates

Don't let this bother you. As long as you are holding high quality notes, and you hold them to maturity, you should get all your money back. There is always the real risk of the issuer defaulting, but if this doesn't happen, you'll get your money back.

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