Focus on Fixed Income
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Focus on Fixed IncomeFocus on Fixed Income is a 45-minute educational program for people who are interested
in creating a reliable income stream. Focus on Fixed Income covers bond characteristics and
features as well as key strategies to get the most out of one’s fixed-income investments.
Seminar ContentsKey Steps to Financial Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Setting the Fixed-income Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Common Bond Characteristics
Issuer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Maturity Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Call Feature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Interest Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Investing in Bonds
Importance of Fixed Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Bond Laddering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Developing Your Fixed-income Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Answer Key . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Welcome – and thank you for taking the time to attend our seminar today. Each of our
seminars is designed to help you become a more educated investor and to assist you on
your path toward reaching your individual financial goals.
As unique as these goals may be, we believe the five Key Steps to Financial Success
provide a clear and balanced path to reaching them.
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1WHERE
AM I TODAY?
2WHERE
WOULD I LIKE TO BE?
3CANI GET
THERE?
4HOW DO
I GET THERE?
5HOW CAN I STAY ON TRACK?
MY FINANCIAL
NEEDS
®
Key Steps to Financial Success
LOAN VS. OWN
Loan investments are when you lend someone your money for a specified period of time. In
exchange, you receive interest payments and, at maturity, your principal back.
Own investments are when you use your money to purchase something. In exchange, you
may receive dividends, and you hope for the value of what you own to grow.
Setting the Fixed-income Foundation
Three Things You Can Do with Your Money
GIFT INVESTSPEND
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LOAN VS. OWN
Mark an X under the appropriate heading of Own or Loan for each investment type.
Investment Type Own Loan
Collectibles
Certificates of Deposit
Stocks
Bonds
Real Estate
Money Market Fund
Precious Metals
Businesses
Checking Account
Setting the Fixed-income Foundation (cont.)
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ISSUER
A legal entity that issues a bond to finance a debt.
An issuer can be:
• A government entity
• A municipality
• A corporation
The issuer is responsible for making timely
interest payments and returning your principal
when the bond matures.
Common Bond Characteristics
Issuer
Maturity Date
Call Feature
Interest Rate
Price
Rating
Taxation
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MATURITY DATE
The time when your principal investment will be
paid back to you.
• Bond maturities typically range from as little as
one month to as long as 30, 40 or 50 years.
• In general, the longer the maturity, the higher
the interest rate.
BOND MATURITIES
Short term (up to 5 years)
Intermediate term (6 to 15 years)
Long term (16 years or more)
Issuer
Maturity Date
Call Feature
Interest Rate
Price
Rating
Taxation
Common Bond Characteristics (cont.)
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CALL FEATURE
The issuer’s ability to buy back the bond prior
to the stated maturity date.
When a bond is called before its stated maturity
date, it could cause you to:
• Lose the regular interest payment
• Reinvest that money when interest rates are lower
An issuer will often call a bond if it is paying a
higher rate than current market interest rates so
that it can issue a new bond at a lower rate. This is
similar to homeowners refinancing a higher-interest
mortgage for a lower-interest one.
Issuer
Maturity Date
Call Feature
Interest Rate
Price
Rating
Taxation
Common Bond Characteristics (cont.)
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Issuer
Maturity Date
Call Feature
Interest Rate
Price
Rating
Taxation
INTEREST RATE
The amount of interest you receive until the bond matures
or is called by the issuer.
Fill in the blanks.
The payment of an interest rate is called a
and is expressed as a percentage of the
bond’s face, or par, value.
The amount of money a holder will get
back once a bond matures is called its
.
Example:If a bond pays a coupon of 5% and its
principal value is $10,000, then it will pay
$500 in interest a year. If the interest is
paid semiannually, then you will receive
$250 twice a year.
If your bond is not callable, you will earn the stated interest
rate for the life of the bond, regardless of changes in the
economy.
Common Bond Characteristics (cont.)
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Issuer
Maturity Date
Call Feature
Interest Rate
Price
Rating
Taxation
PRICE
The amount you pay for a bond. Most bonds are
sold with a $5,000 minimum and in increments of
$1,000 or $5,000 thereafter.
Important facts about bond prices:
• The price of a bond is affected by the changing
level of interest rates.
• There is an inverse relationship between bond
prices and interest rates. When interest rates go
up, bond prices tend to decline, and vice versa.
• The rise or fall of your bond’s value is only
important if you sell your bond prior to maturity.
Examples of premium and discount prices:
A bond at a premium is selling for more than par.
A price of 105 means the bond is selling for 105%
of par value. 1.05 x $10,000 = $10,500
A bond at a discount is selling for less than par.
A price of 95 means the bond is selling for 95%
of par value. 0.95 x $10,000 = $9,500
No matter how much the price of a bond fluctuates,
if you hold it to maturity or until it is called, you
should receive your full principal back.
Common Bond Characteristics (cont.)
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Issuer
Maturity Date
Call Feature
Interest Rate
Price
Rating
Taxation
RATING
Measures the ability of the issuer to make interest
payments and repay the principal at maturity.
Bonds with higher ratings are less likely to default
and therefore more likely to return your principal
when they mature.
BaB
CaaCaC
AaaAaA
Baa
Moody’s
BBB
CCCCCC
AAAAAA
BBB
Fitch
BelowInvestment
Grade(High-yield or“Junk” Bonds)
InvestmentGrade
BBB
CCCCCC
AAAAAA
BBB
S&P
LowerQuality
HigherQuality
Common Bond Characteristics (cont.)
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Issuer
Maturity Date
Call Feature
Interest Rate
Price
Rating
Taxation
TAXATION
Tax-free municipal bonds can help provide a source
of income that’s free from federal and possibly even
state and local taxes. Interest on corporate and most
other bonds is taxable. Some bonds may be subject
to the alternative minimum tax, or AMT.
TAXABLE-EQUIVALENT YIELD
The taxable-equivalent yield is the interest you
would need to earn on a taxable bond to equal the
yield of a tax-free municipal bond.
Depending on the issuer and your state of residence, bonds may be taxable or tax-exempt.
Marginal Tax Rate
10% 12% 22% 24%* 32%* 35%* 37%*
Tax-free Yield Taxable-equivalent Yield*
2.00% 2.22% 2.27% 2.56% 2.77% 3.12% 3.27% 3.38%
3.00% 3.33% 3.41% 3.85% 4.16% 4.67% 4.90% 5.07%
4.00% 4.44% 4.55% 5.13% 5.54% 6.23% 6.54% 6.76%
5.00% 5.56% 5.68% 6.41% 6.93% 7.79% 8.17% 8.45%
Common Bond Characteristics (cont.)
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Source: Edward Jones. This example does not represent currently available rates and does not illustrate the effect of state and local taxes or the alternative minimum tax (AMT).
*These yields include the 3.8% Affordable Care Investment Tax in addition to the Marginal Tax Rate where applicable.
IMPORTANCE OF FIXED INCOME
Fixed-income investments are important because they:
• Can help create a reliable stream of income
• Help reduce overall portfolio risk
• Help preserve investment principal
THREE FUNDAMENTALS OF INVESTING:
While everyone should consider owning income investments, the amount will
vary depending on the investor’s situation, life stage and risk tolerance.
Diversify1
Buy Quality2
Invest for the Long Term3
Investing in Bonds
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DIVERSIFICATION
A strategy to help reduce investment risk by putting funds in several investment categories.
Circle the correct answer.
More than 90% of the variability of an investment portfolio’s return is the result of:
A. Timing the market
B. Security selection
C. Overall asset allocation
D. All of the above
Fill in each level of the investment pyramid with the appropriate investment type.
Although bonds play an important role in your investment portfolio, it’s your overall
mix of investments – asset allocation – that ultimately helps determine how well your
portfolio may perform.
Investing in Bonds (cont.)
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Diversification does not ensure a profit or protect against loss in a declining market.
BOND LADDERING
Purchasing bonds with a variety of maturities,
from short term to long term.
Laddering helps reduce income fluctuation. If one
bond matures during a time when interest rates are
low, other bonds can still be providing income.
Benefits of Bond Laddering:1. Stability2. Flexibility3. Diversification
Short term (up to 5 years)
Intermediate term (6 to 15 years)
Long term (16 years or more)
Investing in Bonds (cont.)
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You must evaluate whether a bond ladder and the securities held within it are consistent with your investment objectives, risk tolerance and financial circumstances
Action Plan Examples
48 hours Schedule a date with your spouse or significant other to review your household finances.
Week Gather all your financial accounts and statements. Be sure to include any savings bonds or CDs so you have a full picture of your current level of fixed income.
2 weeks Schedule an appointment with a financial advisor to review your investments and determine the appropriate amount of fixed income for you.
Month Begin creating a bond ladder, accounting for such factors as bond ratings, taxable-equivalent yields, call features and interest payment dates.
3 months Continue to add to your bond ladder as needed. Consider setting up a central account where your income can be automatically deposited.
Each year Review your strategy to see if you are on target to reach your goals or if adjustments need to be made.
MY ACTION PLAN
Do you have the right amount of fixed income in your portfolio? Take advantage of the strategies we discussed today to help build a steady income stream, diversify your portfolio and help protect your wealth.
Goal: _________________________________________________________________________
What can I do in the next:
48 hours ______________________________________________________________________
Week _________________________________________________________________________
2 weeks _______________________________________________________________________
Month ________________________________________________________________________
3 months ______________________________________________________________________
Each year _____________________________________________________________________
Developing YourFixed-income Strategy
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PAGE 5
PAGE 9
The payment of an interest rate is called a coupon and is expressed as a percentage of the
bond’s face, or par, value.
The amount of money a holder will get back once a bond matures is called its par value.
Investment Type Own Loan
Collectibles X
Certificates of Deposit X
Stocks X
Bonds X
Real Estate X
Money Market Fund X
Precious Metals X
Businesses X
Checking Account X
Answer Key
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PAGE 14
More than 90% of the variability of an investment portfolio’s return is the result of:
C. Overall asset allocation
Source: “Determinants of Portfolio Performance II: An Update,” Gary P. Brinson, Brian D. Singer and Gilbert L. Beebower, Financial Analysts Journal, 1991. Past performance is not a guarantee of future results. Diversification does not guarantee a profit or protect against loss.
The appropriate investment type for each level of the investment pyramid:
Aggressive
Growth
Growth and income
Income
Cash
Answer Key (cont.)
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Alternative Minimum Tax (AMT) – A separately calculated tax created by the IRS to ensure
that high-income individuals, corporations, trusts and estates pay at least a minimum amount
of tax, regardless of deductions, credits or exemptions.
Bond Laddering – Purchasing bonds with a variety of maturities, from short term to long
term.
Call Feature – The issuer’s ability to buy a bond back prior to its stated maturity date.
Certificates of Deposit (CDs) – Savings instruments issued by banks and savings and loans.
CDs offer a variety of maturities and interest payment options.
Corporate Bond – A loan to a corporation. The corporation pays interest on the number of
bonds purchased. On the maturity date, the corporation returns the investor’s principal.
Coupon – The payment of an interest rate expressed as a percentage of the bond’s par value.
Default – The failure of an issuer to make timely payments of interest and principal as they
come due.
Discount Bond – A bond selling at a price below par value.
Diversification – A method to help reduce investment risk by putting funds in several
investment categories (e.g., growth, growth and income, and income).
Fixed-income Investments – Investments that pay interest at specified times in fixed amounts
and are usually issued by a corporation, municipality, government or government-sponsored
agency.
Interest Rate – The amount of interest received until a bond matures or is called by the issuer.
Investment Grade – A ratings designation indicating that the issuer is considered able to meet
its obligation, thereby exposing bondholders to minimal default risk. Investment-grade bonds
are rated BBB (or equivalent) or above.
Issuer – A legal entity that issues a bond to finance a debt. It can be a government entity, a
municipality or a corporation.
Glossary
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Maturity Date – The date the principal investment is paid back to the investor.
Municipal Bond – Fixed-income investments issued by villages, cities, counties, states, state
agencies or special districts. Tax-free municipal bond income is free from federal income tax
and, in some cases, state and local income tax.
Par Value – The amount of money a bondholder will get back once a bond matures.
Premium Bond – A bond selling at a price above par value.
Rate of Return – The ratio of money gained or lost on an investment relative to the amount of
money invested.
Rating – The measure of an issuer’s ability to make interest payments and repay principal at
maturity. Also referred to as credit quality.
Taxable-equivalent Yield – The interest rate a taxable bond must earn to equal the tax-free
yield of a municipal bond.
Glossary (cont.)
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