National Bank » Fixed-Income Markets

Not everyone is aware that today’s financial markets offer a whole group of securities with three very attractive features:

They are safe
They offer a high yield
They can be purchased without commissions

Along with stocks, fixed-income securities belong in every well-diversified portfolio. In this section, we provide you with all the information you need to use them to your clients’ best advantage.

Generally, debt instruments are known as bonds, debentures, or notes and can roughly be divided into two groups: Money Market and Bond Market.

The Money Market is that sector of the Fixed-Income Market which includes all debt securities maturing within one year. Federal Government Treasury Bills (CDN$ and US$ denominated), Bankers’ Acceptances and Commercial Paper are all examples of Money Market securities.

Similarly, the Bond Market is comprised of Debt securities, but these represent investments which mature in terms longer than one year. Examples of Bond investments are Federal and Provincial Bonds, Corporate Bonds, Mortgage-Backed Securities, and Strip Coupons/Zero Coupon Residuals.

POINTS FOR CLIENTS TO CONSIDER WHEN INVESTING IN FIXED-INCOME PRODUCTS:

Clients should always focus on their ultimate investment objectives
Are they investing for the short or long term? They should match the maturities to their needs. Do they require regular interest income (i.e. semi-annual or monthly)? What is their risk tolerance? Check the bond’s debt rating and interest income level.
Stagger the maturities
Clients can stagger the maturity dates of their portfolio holdings to offset the uncertainty of future interest rate levels. For example, one can invest in Government bonds for terms as short as six months or as long as 30 years, and interest is paid semi-annually. With Mortgage-Backed Securities, one has a choice of maturity dates from one to five years, and receives regular monthly income.
Strip Coupons/Zero Coupon Residuals. (Best suited for RRSP/RRIF)
If these securities are purchased outside of RRSPs & RRIFs, accrued interest earned must be reported annually to Revenue Canada. A coupon’s rate of return is the difference between its cost price and maturity value. The return is usually expressed as a compound yield to maturity.