Fixed Income

Types of Taxable Bonds

U.S. Treasury Securities are issued by the United States government and are generally considered the safest of all investments. Because of the safety advantage, government bonds pay relatively lower interest rates than other fixed income securities. Treasury bonds are issued in a wide range of maturities, from four weeks to 30 years. Generally, they are non-callable and the interest payments are exempt from state and local taxes. The timely payments of interest and principal are guaranteed by the U.S. government. Treasury bonds can be purchased through your financial advisor or directly from the U.S. Treasury.

Government-sponsored Enterprise securities (GSEs) are issued by government-created corporations and most carry “AAA” rating.

Major issuers are:

• Fannie Mae (Federal National Mortgage Association),
• Freddie Mac (Federal Home Loan Mortgage Corporation), and
• Ginnie Mae (Government National Mortgage Association), – whose securities are backed by the full faith and credit of the U.S. government; subject to market risk.

Both Fannie Mae and Freddie Mac are government-sponsored entities and operate as public companies. Although both were created by congressional charters, neither is a government agency. Timely payments of interest and principal are sole obligations of the issuers. Their securities do not constitute debt of the United States and are not guaranteed by the federal government. Fannie Mae and Freddie Mac are presently under the Federal Housing Finance Agency’s conservatorship. During the conservatorship, both enterprises will continue normal business operations, including interest and principal payments. For more information, please visit fhfa.gov.

Corporate bonds are debt obligations issued by U.S. and foreign companies to raise capital for business growth and general corporate purporses. Most are unsecured promises to repay the principal at a predetermined future date, although some bonds may be secured by a first mortgage or other assets. Since corporate bonds are considered riskier than other fixed income investments, such as U.S. Treasury bonds, they generally offer higher yields. Corporate bond prices are affected by changes in interest rates, issuers’ credit ratings and other factors. Please consult with your financial advisor about various bond features before investing.

Brokered certificates of deposit (CDs) are issued by financial institutions, such as banks, and are sold directly through brokerage firms like Raymond James. Brokered CDs have characteristics similar to bonds, but offer the protection of FDIC. Currently, the FDIC insurance limits are $250,000 per institution, per beneficial holder. Unless extended by future legislation, the insurance limits will change to $100,000 per institution, per beneficial holder on January 1, 2014.* This excludes certain retirement accounts, such as IRAs, which will maintain $250,000 coverage. FDIC insurance does not protect against principal losses due to sale prior to maturity. Prices of brokered CDs fluctuate during their lifetimes due to general changes in interest rates. Upon maturity, CDs will be redeemed at par. Consult your financial advisor for more information about the difference between regular bank CDs and brokered CDs. To learn more about brokered certificates of deposit, please read our Disclosure Document (PDF).

Mortgage-Backed Securities and Collateralized Mortgage Obligations Mortgage-backed securities (MBS) have traditionally been referred to as relatively high quality, high cash flow generating investment vehicles. Many of these investments continue to command the attention of investors for the same reasons. However, recent turmoil associated with mortgage loan originations reveals the need to understand these investments and the factors that drive their performance. Many potential investors shy away from MBS, while others consider this an opportune time to invest.

A more complex type of MBS is a collateralized mortgage obligation (CMO). CMOs were developed to meet investor demand for more predictable cash flows and specific maturity ranges. These securities can be backed by a pool of mortgages or a pool of existing pass-throughs. CMOs are broken down into classes, called “tranches.” Monthly mortgage payments received from home owners are directed to different classes according to a principal pay-down priority schedule. To learn about different CMO structures, visit the Securities Industry and Financial Markets Association at investinginbonds.com.

Preferred securities offer certain benefits of both stocks and bonds. They are most suitable for investors with long-term time horizons who are interested in a fixed rate of return. Unlike common stocks, most preferred securities are issued with a fixed dividend or interest rate, which is typically paid quarterly, and most have a par value of $25 per share. There are three types of preferred securities: traditional perpetual preferred stock, trust preferreds and debt securities. It is important to understand the capital structure and call provisions, and know the circumstances under which the issuer can stop paying out interest income. Since most preferred securities are considered debt and are senior to common stock, they enjoy a priority claim over common stock on assets of a corporation in case of liquidation. However, they are often junior to bond holders. Preferreds generally have a much longer maturity than bonds, and in a number of cases they are perpetual. Preferred stocks pay dividends, which must be declared by a board of directors. Additionally, some preferred securities are subject to unique risks, which include the fact that an issuer may defer interest payments for up to 10 years or longer. However, an investor will be liable for income tax on accrued but unpaid "phantom income." Further, dividend payments are not guaranteed and will only be paid if interest payments on the underlying obligations are made first, which are dependent on the financial condition of the issuer. Most preferred securities are callable at the option of the issuer, just like bonds, and may be subject to tax-event or special-event calls. The market value is sensitive to changes in interest rates. Unlike common stocks, preferred stocks do not have voting rights.

Foreign currency bonds are issued by corporations and governments who are looking to expand their markets of issuance. In addition to offering bonds in domestic markets and local currencies, governments and companies can also issue bonds in other markets and different currencies. Foreign currency bonds carry additional risks to which domestic bonds are not subject, including currency risk, political instability risk and local market risk. As with any investment, foreign securities should fit within the investor’s stated objectives and risk tolerance, and should be allocated accordingly.

Callable securities, issued by U.S. government entities, corporations and financial institutions, offer a stated final maturity but allow the issuers, at their option, to redeem (or call) the bonds prior to term after an initial non-call period. A call schedule is determined at the time of issuance. Bonds may be called on specific dates only, or at any time after the non-call period. Most bonds are callable at face value plus accrued interest.

To learn more about these types of securities, contact your financial advisor or use the convenient Office Locator to find our office(s) nearest you.

Asset allocation and diversification do not ensure a profit or protect against a loss.

There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise.

U.S. Treasury securities are issued and guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are guaranteed as to the timely payment of principal and interest; however, these securities are subject to market risk if sold prior to maturity.

GSE securities are issued by government-sponsored enterprises (GSE). Payment of principal and interest is solely the obligation of the issuer. These securities, also known as agency securities, are not guaranteed by the U.S. government and are subject to market risk if sold prior to maturity. Mortgage-backed securities and CMOs are priced based on average life. The actual maturity date maybe shorter than than stated. For more information, please review Investor’s Guide to Mortgage Securities and CMOs at finra.org.

Although not obligated to do so, Raymond James and other broker/dealers may maintain a secondary market in brokered CDs, and the price may be more or less than the original purchase price depending in general on the levels of current interest rates. However, there is no assurance that an active market will develop.

High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer's credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of a portfolio.

Insurance, if specified, relates to the timely payment of principal and interest. Insurance does not guarantee market value or protect against fluctuations in bond prices. No representation is made as to the insurer's ability to meet its financial commitments.

A credit rating of a security is not a recommendation to buy, sell or hold and may be subject to review, revision, suspension, reduction or withdrawal at any time by the assigning rating agency. Ratings are subject to change and do not remove market risk.

*Legislation temporarily increasing deposit insurance coverage limits from $100,000 per depositor to $250,000 took effect October 3, 2008, and is currently set to expire December 31, 2013. This means that a $250,000 CD with a maturity date after December 31, 2013, will revert to the $100,000 limit after December 31, 2013. The deposit insurance coverage limits refer to the total of all deposits that an account holder has in the same ownership categories at each FDIC-insured institution. Visit fdic.gov for more information.

To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.

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