Fixed Income

The fixed income asset class is a group of investments that pays you interest for the use of your money and then repays the principal at maturity. When you lend money to a business or institution, it is obligated to pay you periodically at a preset interest rate for a fixed period of time. You may select from a range of instruments that offer:

  • A fixed or variable interest rate
  • A range of fixed terms to maturity
  • High to low security on your principal, depending on the financial condition of the issuer

Risk and Return: The Test of Time

 The All-Fixed Income Portfolio slideshow below illustrates how risk and return on fixed income assets have varied through time. As you review it, you notice the following:

  • The annual returns (bar graph):
    • Very few years had a below zero (negative) return; most years, fixed income assets make money.
    • Over the past decade, yearly returns have been below the long-term average.
  • The growth of $100 (blue line graph):
    • Without the high interest rate years in the 1980s and 1990s, the growth of $100 would have been much lower. While interest rates will likely increase, few analysts expect to see recurring double-digit returns in the foreseeable future.

All-Fixed Income Portfolio

Observe how this all-fixed-income portfolio has faired over the long-term. Click the button below to start.

 

Begin

Compare fixed income to equities (stocks): Proof is in the Pictures: Risk and Return Over Time.

Description of Investments

Descriptions of the various types of fixed income investment instruments are shown in the table below.

Fixed Income Investments

Features

Tax Consequences

Term certificates, guaranteed investment certificates (when the original term to maturity is seven years or less)

  • Fully guaranteed by the banks, credit unions and trust companies that issue them
  • Insured by the Canada Deposit Insurance Corporation (up to $100,000)
  • Competitive interest rates
  • May be redeemable or non-redeemable for the term

 

Government bonds (Government of Canada, provincial government, foreign government, either federal or state)

  • Issued and fully guaranteed by a government body
  • Typically issued for periods of 5–20 years
  • Interest rate depends on credit rating of the issuer
  • Redeemable only at maturity but can be sold at any time
  • Price obtained can be significantly higher or lower than face value, depending on the prevailing interest rate when sold

 

Corporate bonds and debentures

  • Same as for government bonds except they are backed by the assets of the corporation
  • Debentures are a form of bond issued without collateral, other than the creditworthiness of the issuer

 

Retractable preferred shares (may also be placed into the equities asset class)

  • Represent ownership in a corporation, which is senior to ownership through common shares
  • Superior claim on assets, ahead of common shares, if the corporation is dissolved
  • Issued with a known retraction date, when the original investment can be recovered
  • Marketable prior to the retraction date, usually at a price similar to the issue price
  • Pay a fixed rate of dividend, which comes from after-tax profits of the corporation and has priority over dividends on common shares
  • Subject to the solvency of the corporation for payments of dividends and retraction price

Dividends are taxable but, for eligible Canadian shares, investors can claim a dividend tax credit to reduce the rate of tax.

 

Dividends from non-eligible Canadian corporations are fully taxable. No dividend tax credit applies.

 

Any profit or loss, on the sale of shares prior to the retraction date, is treated as capital gain or loss.

Mortgages

  • Residential or commercial, pooled into an investment fund or independent. Real estate is pledged as security
  • Investors may fund up to 100% of an individual mortgage and hold the mortgage directly (mortgage investment corporations, or MICs, bundle a group of mortgages into one investment instrument), offering investors the benefits of professional oversight and administration
  • Interest is earned; economic forces affect interest rates

 

Annuities (life annuities and term certain annuities) *

  • Annuities may be considered a special type of fixed income investment
  • Purchased from a life insurance company, converting a certain amount of your money into a defined monthly income for a certain period of time (such as the rest of your life or that of your spouse) depending on the conditions of the contract

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*See Annuities for more information.