What Fixed Income Means for Your Portfolio

Q: What Is Fixed Income?

A: Simply put, when you invest in fixed-income securities you are lending money to a company or government who promises to repay the full amount to you plus fixed interest payments.

Fixed-income securities — such as bonds, treasury bills and Guaranteed Investment Certificates — can provide a stable, predictable stream of income and capital preservation, and are often considered a good way to diversify a portfolio.

If a company or government needs money to finance a project, buy equipment or otherwise enable growth, it can issue fixed-income securities to raise the money. Investors who buy bonds, for example, are generally paid interest at regular intervals for a predetermined time period. When the bond matures, the issuer of the bond is expected to repay the original investment amount in full.

The Lingo

Here's some of the key language used when talking about fixed-income investments:

• Bond. A fixed-income security issued by a company or government. Corporate and government bonds trade publicly.
• Issuer. The government or company that issues the bond. The issuer is responsible for paying the interest and returning the initial investment at the end of the bond's term.
• Principal. The initial investment, or loan, amount.
• Coupon. The annual interest rate paid on a bond. Investors might receive interest payments at different intervals, but coupon refers to the full annual interest rate.
• Maturity. The date when a fixed-income security term ends. This is the date when the issuer must return the principal to the investor.
• Yield. Think of this as the return provided by a fixed-income investment. A bond yield is based on both the purchase price of the bond and the annual interest payments.

Why Fixed Income?

Fixed-income securities are often used to diversify a portfolio and can help to preserve capital. Assuming a bond is held until maturity, investors are generally assured income at regular intervals — knowing the amount and timing of payments in advance. This can be particularly useful in retirement, which makes fixed income a common choice for retirees.

Because of the nature of the investments, capital growth potential can be lower than other investment options, and like all investments, fixed-income securities can come with risks. Find out more in Fixed Income: Risk vs. Return.

Common Types of Fixed-Income Investments

• Bonds. This includes corporate bonds issued by companies and those issued by all levels of government (municipal, provincial and federal in Canada). 
• Savings Bonds. Issued by Canadian government bodies (provincial or federal), these pay regular interest but have no fees and can be cashed out at any time.
• Guaranteed Investment Certificates (GICs). Issued by a trust company, GICs have a fixed yield/term and generally not redeemable until maturity. Many are insured by the government.
• Treasury Bills. T-bills are short-term (one year or less) bonds issued by the Canadian and U.S. governments. These don't pay regular interest during the term, but accrued interest is paid upon maturity.
• Laddered Portfolio. A portfolio of several bonds that have successively longer maturity dates. This can help mitigate risk related to rising interest rates, as each time a bond matures, the proceeds are reinvested in a new bond at the end of the longest maturity.

Find out more about fixed income:

Fixed Income: The Basics

Fixed Income: Key Benefits