Frequently Asked Questions: Fixed Income
What is a bond?
A bond is a debt obligation issued by a government (federal, state, or municipal), corporation, or other entity. By purchasing a bond, you have effectively loaned the issuer of the bond money. The issuer of the bond must repay your loan with interest. Most bonds pay specified amounts of interest at pre-determined intervals and have a pre-determined maturity date upon which an investor can expect to receive back their principal.
What's the difference between Treasury Bills, Bonds, and Notes?
The difference in terminology relates to the time it takes for each to mature. Generally, a Treasury Bill has a maturity of less than one year, a Note has a maturity between one and ten years, and a Bond has a maturity of ten years or more.
What are the tax implications of bonds?
Income from taxable bonds is subject to federal, state, and/or local income tax. Tax exempt bonds are usually issued by municipal, county, or state governments and interest payments from these bonds may be exempt from federal income taxes. They may also be exempt from state and/or local taxes if you live in the state where the bond is issued. These exemptions only apply to the interest payments; they do not apply to any gains made from the sale of the bond. Vision highly recommends that each investor speak with their tax advisor before purchasing a municipal bond or taking any other specific action with potential tax ramifications.
What does the credit rating for bonds mean?
The credit rating of a bond is an indication of the bond issuer's credit quality, as evaluated by Standard & Poors, Moody's, or Fitch. The rating implies the issuer's risk of default—the higher the bond rating, the smaller the risk of default (AAA is the highest rating). Bonds with a rating of BBB- (Baa3 for Moody's) and above are considered investment grade. Bonds with a rating of BB+ (Ba1) and below are considered "junk bonds" and carry more risk.
What does it mean if a bond is "callable?"
If a bond is "callable," it may be redeemed by the issuer before the date of maturity. The issuer may pay the holders a premium price if the bond is retired early. Bonds are usually called when interest rates fall and the issuer can save money by issuing new bonds at lower interest rates.
Are there fixed income securities that protect against inflation?
Treasury Inflation Protected Securities (TIPS) are fixed income securities where the principal is adjusted every six months to adjust for inflation. TIPS sacrifice some yield as a trade-off for inflation protection.
What does "Net Yield Basis" stand for?
"Net Yield Basis" means that commissions or mark-ups have already been factored into the purchase price of the bond.
Are municipal bonds always free of taxes?
Municipal bonds are generally free from Federal, state and local tax for residents of the issuing state. However, residents from other states who purchase a particular municipal bond do not get to enjoy the "triple tax free" benefit of the bonds (just the Federal savings). Bonds issued by U.S. Territories are usually triple tax exempt regardless of what state the purchaser lives in. Furthermore, certain municipal bonds may be subject to the Alternative Minimum Tax. Vision highly recommends that each investor speak with their tax advisor before purchasing a municipal bond or taking any other specific action with potential tax ramifications.
I have some fixed income investments maturing soon. Can Vision help me to decide on potential replacements?
Vision is a full-service broker/dealer and as such can help you find different investments among numerous asset classes. As a discount brokerage firm Vision does not generally offer specific advice regarding which investments you should purchase. However, we can offer additional assistance in one of two ways:
- If you feel that for your portfolio or at least a portion of your portfolio you would like the assistance of a Financial Advisor we can refer you to one of the professionals at our affiliated company, Vision Brokerage Services.
- If your fixed income portfolio is currently (or may become) greater than $500,000 you can take advantage of our portfolio construction service. This valuable service provides a detailed and informative report making specific fixed income recommendations based on each investor's unique parameters. The information provided regarding risk tolerance, liquidity needs, time horizon, age, tax bracket, state of residence, etc. is used to custom tailor a fixed income portfolio.
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