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Fixed Income Investments: The Basics

Bonds and GICS are examples of fixed income investments
Bonds and GICs are examples of fixed-income investments

Most investors have seen the term fixed income on a document or heard their registered investment advisor mention it in conversation. While this type of investment is not new, investors should know the basics of investing in fixed income investments before making a decision to invest in them.

What is a Fixed Income Investment?

Fixed income means a government or company promises to pay a fixed rate of interest at certain times and to repay the “face value” at the end of the investment. In general, fixed income means owning debt. The investor loans money to the issuer and receives repayment of the loan at the end of the term plus a return. Often, the investor receives regular interest payments during the term of the loan. With some fixed-income investments, the return is only at the end of the investment.

There are different types of fixed-income investments and they can be lower or higher risk. A common way retail investors can purchase a fixed-income investment is through a mutual fund or exchange-traded fund (ETF).

Bonds and Guaranteed Investment Certificates (GICs) are two common fixed income investments. Bonds, especially those issued by the Government of Canada, are a big topic in the media when there is talk of an interest rate change. GICs are a type of fixed income investment issued by a financial institution and are another option.

Some other forms of fixed income investments include Canada Premium Bonds, treasury bills (T-bills), debentures, commercial paper, and promissory notes. Different forms of fixed income investments have different levels of risk and provide different returns. A credit rating for a fixed-income investment, or its issuer, can help you learn about its risk.

How Fixed Income Investments Differ from Other Investments

If you’re considering a fixed income investment, ask yourself these questions over the course of your research:

  • If a fixed-income investment locks in my funds until a pre-determined date, am I financially secure enough to lock in my money?
  • Is regular income from interest more important to me than growing my initial investment?
  • What is the credit worthiness of the fixed income investment I am considering, or of its issuer?
  • Do I understand how my investment, or its return, could change in value over its lifetime?
  • Is the person selling the investment allowed to sell it in the first place?
  • Are there tax implications for holding this kind of investment, especially in terms of interest income and capital gains?

Always read the fine print and ensure you understand that even a seemingly low risk investment could lose some or all of its value or provide too little income to keep up with the cost of living.

How to Talk about Fixed Income Investments

The key concept to understand when speaking with a registered investment advisor is how fixed income investments fit into your financial goals.

If you choose to talk to a registered investment advisor about fixed income investments, make sure you ask about fees and charges. Your registered investment advisor or their firm must inform you of the compensation they receive as a result of you buying the investment. The trade confirmation must also show the yield—one of the major reasons people look to fixed income investments.

More Information on Fixed Income Investments

The Types of Investments section on InvestRight has pages describing the details of bonds and GICs. Investors may also benefit from looking at the Know Yourself section of this site, especially the Personality Quiz and pages about financial goals and investment planning.

If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Contact Centre at 604-899-6854 or 1-800-373-6393, or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.

InvestRight.org is the BC Securities Commission’s investor education website.

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