Fixed interest securities
Fixed interest securities are generally suited to investors seeking income, however where a security trades at a discount to face value, some capital growth over time can also be expected. They are intended to pay a consistent stream of distributions based on either fixed or floating rates.
Corporate and Bank issued securities offer investors the benefit of than traditional fixed interest securities (such as government bonds) while providing liquidity via an ASX listing. These securities are generally issued by well-known companies in the S&P/ASX 200 Index; many of which are investment grade rated.
Features of a fixed interest security
- can provide a regular income stream
- usually higher yields than cash
- access to a range of maturity terms
- competitive pricing
- may suit investors of all risk profiles
- liquidity available from an active panel of fixed interest desks
- historical negative correlation of debt market returns to other asset classes such as shares
- some debt instruments, such as fixed interest bonds, allow investors to generate capital gains (or losses) from changes in interest rates
- may help enable clients to diversify or balance their portfolio Types of Bonds
- There are many types of bonds, broadly they can be classified into:
- Government debt market
- Corporate Bonds/Debentures
There are standard bonds and variants, here is a list of the variant types:
- Floating Rate Bonds – the interest rate changes over time
- Zero coupon bonds – no interest payments
- Deferred coupon bonds – no interest paid in the first year
- Indexed bonds – the interest rate is based on a margin above an index (such as CPI)
- Convertible bonds – These bonds convert to ordinary shares either at a fixed price or number on maturity of the bond
- Perpetual bonds – these bonds don’t have a maturity date. The initial sale price the issuer receives is never repaid but interest is paid perpetually.
- Mortgage backed bonds – these bonds offer a pool of mortgages as security giving investors a reasonable assurance of receiving their interest payments and face value on maturity from the mortgage repayments.
- Junk bonds – these bonds offer a higher yield in comparison to other securities because the issuer has a higher risk.
When trading bonds there are two ways that you could make a capital gain/loss:
- If you hold the bond until maturity then the difference between the purchase price and the face value you receive at maturity is the capital gain or loss
- If you sell the bond before maturity then the difference between the purchase price and the sale price is the capital gain or loss.
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