Fixed Income Products and Portfolios

Goals

Identify the types of fixed income (FI) products and the categories of analysis (for example, return, interest rate risk, credit risk, and exposure). Include other relevant information about the various types of FI products in a portfolio, like which products should be included to mitigate interest rate risk.

Early Findings

Fixed Income Products

  • Fixed income is a type of investment security that pays investors fixed interest payments until its maturity date, at which point investors are repaid the principal amount they had invested.
  • Fixed income markets include publicly and non-publicly traded instruments.
  • The most common FI products include treasury bills, treasury notes, treasury bonds, treasury inflation-protected securities, municipal bonds, corporate bonds, junk bonds, a certificate of deposit (CD), fixed-income mutual funds, asset-allocation or fixed income ETFs.
  • Other FI products include commercial paper, banker's acceptances, repurchase agreements, and asset-backed securities.

Categories of Analysis

  • Useful metrics for bonds and CDs include credit rating, taxability, sector exposure, type, alternative minimum tax, use of proceeds, duration, overall Morningstar rating, underlying ratings, state exposure, and issuer concentration.
  • Useful metrics for bond funds include credit quality, taxability, duration, overall Morningstar rating, US vs. foreign exposure, country diversification, portfolio diversification, use of proceeds, revenue source diversification, and alternative minimum tax.

Fixed Income Portfolio Management

  • Some common risks associated with FI products include the borrower's vulnerability to defaulting on its debt and exchange rate risk for securities denominated in foreign currencies.
  • Floating-rate and inflation-linked bonds can be used to hedge inflation risk.
  • In building a portfolio, liquidity must be considered, as many bonds do not trade or trade infrequently. Therefore, there exists a trade-off between liquidity and yield, with less liquid bonds having higher yields typically.
  • Some benefits of investing in FI products include that their stability may help smooth out the highs and lows of the stock market, they preserve capital and therefore are helpful in saving for a future expense, and they have preferential tax treatment.
  • FI portfolios should be developed with factors in mind like the owner's age, income, lifestyle, known future expenses, appetite for risk, capacity to supplement losses, and goals.

Proposed next steps:

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