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RBC Wealth Management Canada > RBC Dominion Securities > Investor Tools &
Resources > Investor Education Centre > Understanding Fixed Income Securities
Understanding Fixed Income Securities
The following frequently asked questions provide a brief introduction to fixed-
income securities:
What are fixed-income securities?
Why invest in fixed-income securities?
What are some examples of fixed-income securities?
What are fixed-income securities?
A fixed-income security is a debt instrument issued by a government, corporation or
other entity to finance and expand their operations.
Fixed-income securities provide investors a return in the form of fixed periodic
payments and eventual return of principal at maturity. The purchase of a bond,
treasury bill, Guaranteed Investment Certificate (GIC), mortgage, preferred share or
any other fixed-income product represents a loan by the investor to the issuer.
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Why invest in fixed-income securities?
Fixed-income securities can be an important part of a well-diversified portfolio. For
many investors, particularly retirees, fixed-income investments are a secure, low-
risk way to generate a steady flow of income. As long as they are held to maturity,
fixed-income securities will provide a guaranteed return on your investment, with
payments known in advance.
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What are some examples of fixed-income securities?
The following is a list of some common fixed-income securities:
Bonds
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 principal (or face value) of
the bond on a fixed maturity date and to make regularly scheduled interest
payments (usually every six months). The major issuers of bonds are governments
and corporations.
Savings Bonds
Savings bonds issued by the Canadian and various provincial governments are
different from conventional bonds. Canada Savings Bonds (CSBs) typically pay a
minimum guaranteed interest rate (there are also compound interest bonds
available). A CSB carries no fees and is cashable at any time. The amount received
for a CSB will never go below its face value if redeemed by the issuer, while the
price received in the market for a conventional bond will depend on the level of
interest rates at the time of sale. In addition, only residents of Canada (or of the
province of issue) are eligible to purchase CSBs, and only up to a predetermined
amount.
Guaranteed Investment Certificates (GICs)
A GIC is a note 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. GICs are generally non-redeemable before the term is
complete.
Treasury Bills
Treasury bills (T-bills) are the safest type of short-term debt instrument issued by a
federal government. Ideal for investors seeking a 1- to 12- month investment
period, T-bills are highly liquid and very secure.
Bankers Acceptances
Bankers Acceptances (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.
NHA Mortgage-Backed Securities (MBS)
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
Strip coupons and residuals are instruments purchased at a discount that mature at
par (100). They grow over time and while any interest income is not payable until
maturity, a nominal amount of interest is accrued each year and must be claimed as
income by the purchaser for tax purposes. For example, a Canada strip coupon
maturing on March 15, 2006 with a yield of 5.31% would be priced at 77.07 to
mature at 100. The difference between the purchase price and 100 is treated as
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 Retirement
Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs).
Laddered Portfolio
A laddered portfolio is comprised of several bonds, each of which has a successively
longer term to maturity. Each position in the portfolio is usually the same size as the
next, with intervals between maturity dates roughly equal. A laddered portfolio
helps spread reinvestment risk over the long term, helping to average out the
effects of overall interest rate changes.
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