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Fixed Income Investments
Bonds and other fixed-income investments don't enjoy the publicity of
stocks. But their relative predictability can potentially help balance
stock market risk and reduce volatility in your portfolio. Whether you're
a newcomer to investing or approaching retirement, you may wish to consider
the merits of fixed-income investments. By definition, a fixed-income
investment is any that pays a predetermined (fixed) regular rate of
return until it matures. Bonds, which are essentially fancy IOUs, are
the most notable example. Money market instruments are also a type of
fixed-income investment.
Much To Learn
If you think you need to learn more about fixed-income investments,
you're not alone. In a 1999 study of retirement plan participants, 87%
didn't realize that short-term securities (maturing in one year or less)
are in a money market fund. * In addition, 42% didn't think they could
lose money in a bond fund and 60% didn't think loss was possible in
a government bond fund; both answers are incorrect. While fixed-income
investments may be predictable, they're not risk-free. There's the possibility
that the bond issuer may default on its payments, although this occurs
infrequently. Another notable risk relates to inflation--if it increases,
the fixed income of your investment loses some of its buying power because
its rate of return remains the same rather than keeping pace with prices.
Types Of Fixed-Income Investments
A variety of fixed-income investments are available:
- Money market instruments are short-term (one year or
less) debt securities. Because of the generally high credit quality
of money market debt and its short term, this is among the least
risky of fixed-income investments.
- Treasury securities or "Treasuries" are bonds issued
by the U.S. Treasury Department in maturities ranging from three
months to 30 years. The interest on Treasuries is exempt from state
and local tax. Since the federal government issues them, Treasuries
have very low risk.
- Government agency securities are issued by agencies
of the U.S. Government, such as the Government National Mortgage
Association (Ginnie Mae). Unlike Treasuries, they are not government-guaranteed.
- Municipal bonds are issued by state and local governments.
Most municipal bonds are exempt from federal tax and many are also
free of state and local tax.
- Corporate bonds are issued by corporations. Your rate
of return will depend on the creditworthiness of the issuing corporation.
They are fully taxable.
A Better Way To Buy
It's easier to select individual stocks than bonds. Why? For one, the
number of stocks available to investors numbers in the low five digits;
with bonds and other fixed income investments, it's in the millions. Second,
while much information is publicly available on stocks, it is not so easily
obtainable on many fixed-income investments. A professional investment
manager has the best access to information and can help you select fixed-income
investments appropriate for your portfolio. Or, you may decide to choose
a bond mutual fund. Either way, one of our investment professionals can
help you put together a portfolio that matches your goals, risk tolerance
and timeline.
* John Hancock Financial Services' survey of 801
401(k) plan participants, ages 25 to 45, 1999.
*Investment
services offered through Union Bank & Trust Company’s Trust Division.
Investment products: Not FDIC Insured - No Bank Guarantee - May Lose
Value.
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