Printer Friendly

Fixed-income securities: a safer investment.

With the recent ups and downs on Wall Street, many people have become disenchanted with the stock market and are looking for safer alternatives for investing their money. if your primary goal is a safe, steady rate of return on your investment, you should look into the so-called fixed-income securities.

These securities represent the "bonds" half of the "stocks and bonds" equation. They include Treasury bills, as well as government and corporate bonds. The name fixed-income securities reflects the fact that they promise a constant rate of return throughout the life of the obligation. Many financial analysts consider fixed-income securities to be among the safest of investments.

As with stocks, fixed-income securities represent loans made by an investor to a corporation or a government entity. Fixed-income securities are different from stocks however, in that they do not represent any ownership interest in the corporation or government. Whereas a stockholder is an "owner," a bondholder is a "lender." The bond is a debt to be paid back in full to the lender at a specified time.

The interest rate on a particular bond is determined by the prevailing market rate at the time of purchase and stays constant until the debt matures. If the security is retained until maturity, the borrower is obligated to repay the face value of the obligation. If a bondholder sells before maturity, however, the value of the security may change because the prevailing market rate at that time determines what price a buyer will pay. This is an important concept to understand in investing in fixed-income securities, especially if there is a possibility that funds invested may be needed before the maturity of the obligation.

What are the major forms of fixed-income securities?

Fixed-income obligations take many forms. For example, some, known as notes, are little more than IOU's. On the other end of the spectrum are bonds, which are typically secured by property owned by the issuing corporation or government entity.

It is no secret that the federal government issues more securities (owes more money) than any other single entity. These obligations by Uncle Sam have varying forms and maturities. Some are direct obligations of the United States government backed by "full faith and credit;" while others are obligations of government agencies (such as the Federal Home Loan Bank or Student Loan Marketing). Because the direct obligations have a greater certainty of payment than those of government agencies and corporations, they generally pay a slightly lower rate of interest.

Treasury bonds, notes and bills are direct obligations backed by the full faith and credit of the federal government. Treasury bonds have a fixed maturity date that is more than 10 years from the date of issue. Treasury notes have a fixed maturity of at least one year, but no longer than 10 years. Treasury bills have the shortest maturity date of all - usually three, six or 12 months.

How safe are fixed-income securities and which should you buy?

It's important to note that although fixed-income securities are generally considered to be safe investments, they are not entirely risk free. A corporation issuing bonds could go bankrupt, or you may need to sell before the date of maturity. If you are considering buying corporate bonds, be sure and check out the corporation carefully - a company that is heavily debt-laden may not be a safe investment.

It is also commonly assumed that government issued fixed-income securities are safer than those issued by a corporation, since the government has the power to tax in order to meet its obligations. However, this may not always be the case. Some municipal securities contain provisions that the obligation is to be paid exclusively by the income from a specific source. This is especially common with securities issued for financing industrial projects such as power plants, factories, hospitals and other income-producing projects.

The type of investment that's right for you depends on your circumstances and goals. As a general rule, Treasury bills and bonds are the safest of the fixed-income investments, followed by municipal bonds and then corporate bonds. If you venture into corporate bonds and you want to maximize safety, you are nearly always better off buying a "package," or a mutual fund, rather than individual issues because diversification provides greater protection. Mutual funds can also be a good investment for people seeking not only diversity but also a mix between stocks and bonds.

Whatever your situation, individual circumstances vary, and you should always seek the advice of an attorney, accountant or financial advisor before making any investment decisions.

How to receive a fixed income from the Arthritis Foundation

Investing your money in corporate or government securities is not the only way to receive a fixed annual income. In fact, investing in the Arthritis Foundation may be one of your best investment choices for 1988. By purchasing a charitable gift annuity or funding a charitable remainder annuity trust, you not only guarantee the dividends for yourself and your spouse for life but you receive tax advantages as well.

A charitable gift annuity is backed by the entire assets of the Arthritis Foundation. You may receive the income immediately, or it may be tax-deferred. You receive an income tax deduction in the year you make the gift and approximately 60 percent of the income you receive is tax-free.

A charitable annuity trust also has tax advantages. You specify in the trust agreement the amount of money to be paid out and who will receive it. You may name yourself as lifetime beneficiary, or you may name yourself along with your spouse or other individual. After the lifetime payments, the trustee then distributes the property remaining in the trust to the Arthritis Foundation.

A charitable remainder annuity trust is especially beneficial if it is funded with appreciated stock. This allows you to avoid the capital gains taxes that would otherwise be due on the sale of the stock. In addition, you receive an income tax charitable contribution deduction.

We would be pleased to provide you or your financial advisor with further details on these and other charitable giving plans. Contact your local chapter of the Arthritis Foundation or write to: Department of Planned Giving, Arthritis Foundation, 1314 Spring Street,Atlanta GA 30309.
COPYRIGHT 1988 Arthritis Foundation, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1988 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Publication:Arthritis Today
Date:Mar 1, 1988
Previous Article:One day at a time.
Next Article:Fashion with flair.

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters