As mentioned in my previous posting, I am sharing my views on fixed income securities, which refers to financial products that offer investors a return in the form of fixed periodic payments (coupon) and the eventual return of principal at maturity. Example of fixed income securities include government bonds and preference shares issued by companies.
Benefits of Investing in Fixed Income
Historically, the returns of stocks and bonds moved in opposite directions at the same time. Investors can reduce their portfolio risk through diversifying their investments on fixed income securities, which offer investors a predictable income stream during times of market volatile.
Fixed income securities are very transparent in the sense that investors would know how much interest they can expect to receive, how often they will receive it and when they can get back their principal investment monies. Investors can also check the prices in real-time and the volume information from SGX website and their broker’s trading platforms. Fixed income securities also operated like shares and investors can buy and sell them through broker anytime during trading hours.
How does it works?
Issuer borrow principal amount from investors and repay the money at maturity. In exchange, investors receive coupons (interest payments), usually paid in twice-yearly installments. For example, a $1000 bond paying $45 a year as a $45 coupon, or a coupon rate of 4.5%. Investors can also choose to dispose the security for capital appreciation.
What are the risks?
Like all other investments, fixed income investments is not risk-free. The bond’s value will fluctuate with market conditions. For example when interest rate rise, bond prices fall. However, you need to be concerned with market risk only if you decides to sell the bond before maturity date. There is also a possibility that issuer may not be able to meet its obligations in terms of coupon payments or worse still, may not be able to pay the principal amount back to the investor at maturity. This situation is known as default risk and this is what is happening in Europe. Investors also need to consider foreign exchange risk, which may increase or erode investment returns on fixed income security.
Please note that I am not a professional financial consultant and that the above article is not meant to promote fixed income securities as a form of investment. I am just sharing some of my thoughts and research on how we can diversify our investments. Fixed income securities can be consider as part of wealth preservation strategy. I won’t say investing in fixed income will make us rich, but it definitely offers a protective shield against the corrosion effects of inflation.
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