Complete Glossary: essential fixed-income investment terms

Summary:

1. Introduction;

2. CDs;

3. Treasury Bonds;

4. T-Bills;

5. Munis;

6. MBS;

7. Corporate Bonds;

8. Fixed-Income Mutual Funds;

9. Agency Bonds;

10. Conclusion;

11. Comments section.

Introduction

If you are just starting to invest, the world of fixed-income can be an excellent entry point. To simplify your journey, we’ve compiled the main terms related to this type of investment with clear definitions and useful examples. Check it out!

1. CDs (Certificates of Deposit)

A CD is a time deposit offered by banks and credit unions. When you invest in a CD, you agree to leave your money in the account for a fixed term in exchange for a guaranteed interest rate.

• Fixed-Rate CD: Offers a predetermined interest rate for the term of the deposit. Ideal for those seeking stability.

• Bump-Up or Step-Up CD: Allows for a rate increase if market rates rise during the term.

Advantages: High security, FDIC (Federal Deposit Insurance Corporation) protection, and predictable returns.

Example: A 12-month CD with a 4% annual interest rate will yield $400 on a $10,000 investment.

2. Treasury Bonds

Treasury Bonds are government-issued securities with long-term maturity (10 to 30 years). They pay a fixed interest rate semi-annually and return the principal upon maturity.

Advantages: Backed by the U.S. government, making them one of the safest investments.

Example: A Treasury Bond with a 3% annual interest rate pays $30 per year for every $1,000 invested, plus the principal at maturity.

3. T-Bills (Treasury Bills)

T-Bills are short-term government securities with maturities ranging from a few days to one year. They are sold at a discount and pay the full face value upon maturity.

Advantages: High liquidity and minimal risk.

Example: Purchasing a $10,000 T-Bill for $9,800 will yield $200 in profit upon maturity.

4. Munis (Municipal Bonds)

Munis are issued by state or local governments to fund public projects. Interest earned is often exempt from federal income tax and may also be state- and local-tax-free.

Advantages: Tax benefits and relatively low risk.

Example: A municipal bond yielding 2.5% tax-free interest is equivalent to a taxable bond yielding 3.3% for someone in the 25% tax bracket.

5. MBS (Mortgage-Backed Securities)

MBS are securities backed by a pool of home loans. Investors receive regular payments derived from mortgage interest and principal.

Advantages: Higher yields compared to Treasuries and corporate bonds, with monthly income.

Example: Investing $10,000 in an MBS with a 4% yield generates $400 in annual income, distributed monthly.

6. Corporate Bonds

Corporate Bonds are debt securities issued by companies to raise capital. They can be classified as investment-grade (lower risk) or high-yield (higher risk, but greater returns).

Advantages: Higher returns compared to government bonds, with a wide range of maturities.

Example: A corporate bond with a 5% annual yield generates $500 per year on a $10,000 investment.

7. Fixed-Income Mutual Funds

Fixed-income mutual funds invest in a diversified portfolio of bonds, including government, municipal, and corporate bonds. These funds are managed by professionals and provide diversification.

Advantages: Professional management and access to various fixed-income securities.

Example: A fixed-income fund may allocate 60% to Treasury Bonds, 30% to corporate bonds, and 10% to municipal bonds, targeting a balanced risk-return ratio.

8. Agency Bonds

Agency Bonds are issued by government-sponsored enterprises (GSEs) like Fannie Mae or Freddie Mac. They are used to fund specific sectors, such as housing or agriculture.

Advantages: Slightly higher yields than Treasuries, with implicit government backing.

Example: An agency bond with a 2.8% yield provides predictable income with moderate risk.

Conclusion

To access the other DicioMoney's posts, click on the button below!

These are the primary fixed-income investments available in the U.S. market. With this detailed information, you can make more informed choices and align your financial strategy with your goals. Have questions or want to suggest other topics? Leave a comment!

Comments section