Fixed-Income Investments
Posted by Gail | Filed under Investing
12 more sleeps until our Picnic in the Park on Sunday, July 11. Put it on your calendar today and remember to bring a little sumthin’ sumthin’ to eat that you’d like to share. If this is the first time you’re hearing about this, see the details at the end of this blog. And check out the Sticky Situation Question at the end too.
There are a whack of investments that fall into the fixed-income category: from the lowly savings account, to the not-much-more-esteemed GIC, to bond and mortgage mutual funds to extremely liquid treasury bills, to mortgages and their derivatives, such as mortgage-backed securities, to what may be the most popular of all fixed income investments: bonds, both of the corporate and government variety.
Bonds are a way for an entity – be it the federal, provincial/state or municipal governments, or a corporation – to raise money to do the things they want to do. In essence, they are borrowing money from you and paying you interest.
Most bonds pay a set rate of interest semiannually for the life of the bond, with the principal due at maturity. However some bonds pay a floating rate of interest that adjusts to more accurately reflect prevailing market rates. This rate is periodically reset in line with a base interest-rate index such as the rate paid on treasury bills.
Large corporations have found many ways of designing bonds to attract investors while keeping costs in line. These range from mortgage bonds, which corporations issue when they have adequate fixed assets to be pledged, through to debentures, which companies can issue if their financial rating is high enough to allow them to borrow without pledging any assets. When a company does not possess fixed assets or does not wish to pledge against those assets, but is prepared to pledge securities, collateral trust bonds are issued.
A bond’s maturity refers to the specific future date on which your principal will be repaid. Maturities can range from one day up to 30 years. In some cases, bonds have been issued for terms of up to 100 years. Maturity ranges are often categorized as short-term (up to 4 years) medium-term (5 to 12 years) and long-term (12 years or more). While the maturity period is a good guide as to how long the bond will be outstanding, certain bonds have structures that can substantially change the expected life of the investment. With a “call” provision, the issuer may choose to repay the principal at a specified date before maturity. Not a great feature during periods of falling rates since the issuer may call the bonds and you’ll get stuck reinvesting your money at a lower rate. Conversely, the bond may have a “put” feature that would allow bondholders to demand the issuer repurchase the bond prior to maturity. Great feature if you think you might need the money at a moment’s notice.
Since many bonds do not reach maturity for years, or even decades, credit quality is a very important consideration when choosing a bond. The issuer is responsible for providing details as to its financial soundness and creditworthiness. This information is contained in a document known as an offering document, prospectus or official statement.
Rating agencies assign ratings to bonds when they are issued and monitor developments during the bond’s lifetime. Bonds are rated based on the quality of the bond itself and the credit worthiness of the issuer. Usually the lower the bond’s rating the higher its yield. To attract investors, issuers have to pay a higher rate of interest to compensate for the higher risk.
Bond ratings fall into two main categories and are graded on a scale: investment and high-yield or junk bonds. While not all bonds are rated, you might want to think twice about investing in a bond that hasn’t been. Two of the largest rating agencies are Standard & Poor’s and Moody’s and they rate bonds from Highest Quality to Default.
Next Week: More About Bonds
Last Week: 7 Things to Consider Before You Buy a Mutual Fund
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Have you voted in this week’s poll? It’s all about grocery shopping!
Sticky Situation Question: If someone asks how much you spent on your car, your clothes, or your house, and you think it’s none of her business, how do you handle that situation?
The 2nd Annual Picnic in the Park
Date: Sunday, July 11, 2010 from 10 – 3
Where: High Park, Toronto – Area #3 and shelter – here is a map (Note the different location in the park.)
Rules:
- Zero tolerance alcohol policy
- All waste/recyclables must be placed in appropriate containers – if not available, must remove any waste at own cost
- No amplified music or microphones
- Park in designate parking areas only, no parking on grassy areas
- Sale of food/items not permitted
- Tables, BBQs and parking cannot be guaranteed
- No balloons, decorations or signage permitted
- Gas/propane BBQs only, no charcoal BBQs
- No inflatable games, dunk tanks, generators, tents or tarps
- No outside caterers
Food: Last time people brought an assortment of foods (apps, mains, desserts) and drinks and it worked out very well. Bring your own dishes and cutlery to minimize waste as we also did last time.
June 29, 2010 at 6:35 am
Gail,
I truly want to thank you from the bottom of my heart — not only in regards to your information about bonds — but for the variety of knowledge you provide; from motivation & inspiration, to money-hacks and basic “how to…” tips, you’ve provided such insight into a financial world in which I, like many other individuals, were seemingly left in the dark. (I also want to thank to all of YOU: the commentors, it’s such a great feeling to know that I am not in this journey of “debt-free forever” alone.)
In regards to the “Sticky Situation Question” I’m actually a pretty straight-forward individual with little problem disclosing my costs. (It pays to be thrifty! Watch their mouth drop!)
However, if it was the financing or purchase of something I felt that was genuinely private for some reason or another, my quick and polite answer often is: “Believe me, you wouldn’t want to know.” << Fairly neutral, and if they think the price sounds daunting, they'll be less inclined to badger me for more information.
PS. I am truly looking forward to recieving my BIG "Gail Hug" at the picnic!
Have A Pleasant Day, Everyone!
June 29, 2010 at 6:35 am
Hopefully you’ll post about how the ratings companies are a terrible source of information since they routinely get the ratings extremely wrong. Whether through deception or incompetence is a different question. Part of what led to the financial disaster was overinflated ratings of bonds and other financial instruments.
June 29, 2010 at 6:44 am
Does anyone else’s comments on here keep dissapearing?
June 29, 2010 at 7:13 am
Sticky Question….answer.
I have dealt with this several times. From a certain family member. My answers vary.
“If you have to ask, you can’t afford it”
“Why do you ask?”
“Why would you ask?”
“Too much”
“The moon”
and the list goes on…..although I must say I think he finally got the point and now doesn’t ask.
June 29, 2010 at 7:21 am
Sticky Question…if someones asks; I tell…no big deal to me…and no, I don’t ask people what they paid (unless it’s my sister or my mom..lol)
June 29, 2010 at 7:33 am
Sticky Question: I usually answer honestly. I look at this question as a little way to burst that bubble where people are afraid to talk about money… Of course, I usually add “I saved up for it”
June 29, 2010 at 7:55 am
If I really think it is none of their business then I say “I perfer not to discuss that” or something to that effect.
June 29, 2010 at 8:07 am
for me, it really depends on who’s doing the asking, since i would never mind discussing things like that with my sisters, my parents, or my very close friends. that said, i’m not overly private about discussing the taboo conversation topics, and my friends and i rely on each other a great deal for learning how to improve our finances (although it’s true that i’ve never asked the particulars of what they earn and vice versa).
I think in any case, i’d want to clarify why exactly they wanted to know – i know how hard it can be to get a sense of what you SHOULD spend on a major purchase when you can’t really ask people how much they paid. i’d probably say something along the lines of “what kind of info are you looking for? do you want to know about (the cost of houses in this neighbourhood, why i’m buying my car and not leasing, how much R&R jeans sell for these days)?” so i could tell them what they wanted to know exactly.
However, if they said, “oh, i was just curious”, and i get the sense that they’re being nosy, i’ll be vague and say “about what you’d expect, although i’m pretty happy with the deal i got” and leave it at that til they ask more.
June 29, 2010 at 8:07 am
I generally respond with “Oh, I forget now that all the paperwork is filed away, why do you ask?”…usually stops ‘em dead in their tracks. Alternatively, I can always ‘defer’ to my husband and say he makes the payments for ‘X’, so I don’t know as we keep our money separate. Of course I DO know how much things cost, but they don’t need to know I’m not an ostrich right?
I had a neighbour who always asked what something cost, and finally one day I made mention of how often she’s asked me the question. Her response was that she’s a natural born accountant and can’t help herself so she can calculate interest and such. Strange bird, but hey, everyone’s got their quirks right? A former co-worker also used to ask everyone how much things were, like houses, vehicles, taxes, etc. but I personally think it’s because she had to “up” them, even if it was by $10. We all knew how much her cottage reno was, how much her rings cost, how much her property taxes were…ugh, even I don’t pay attention to my own life that closely!
June 29, 2010 at 8:08 am
for me, it really depends on who’s doing the asking, since i would never mind discussing things like that with my sisters, my parents, or my very close friends. that said, i’m not overly private about discussing the taboo conversation topics, and my friends and i rely on each other a great deal for learning how to improve our finances (although it’s true that i’ve never asked the particulars of what they earn and vice versa).
I think in any case, i’d want to clarify why exactly they wanted to know – i know how hard it can be to get a sense of what you SHOULD spend on a major purchase when you can’t really ask people how much they paid. i’d probably say something along the lines of “what kind of info are you looking for? do you want to know about (the cost of houses in this neighbourhood, why i’m buying my car and not leasing, how much R&R jeans sell for these days)?” so i could tell them what they wanted to know exactly.
However, if they said, “oh, i was just curious”, and i get the sense that they’re being nosy, i’ll be vague and say “about what you’d expect, although i’m pretty happy with the deal i got” and leave it at that til they ask more.
June 29, 2010 at 8:08 am
In response to the sticky situation question… I take into consideration who the asker is. That dictates my response.
If it is none of their business, as you state, then I simply respond with a question “Why do you ask?”
June 29, 2010 at 8:59 am
Sticky question: In my experience, people from Canada are usually very happy to say what they paid for things, I’m thinking particularly women with clothes, as they are proud of what a ‘deal’ they got. Whenever I compliment someone on an article of clothing I get a response on what a sale it was, or that they got it at a discount store like Zellers or Superstore or something. My friends from other countries come here and often comment on the phenomenon.
June 29, 2010 at 9:22 am
I tend to not care if people or nosy or not, so I probably wouldn’t have an issue telling the person. However, if I truly did not like their motivation, or thought their was a hidden agenda, I would also feel no guilt in “stretching” the truth.
June 29, 2010 at 9:31 am
Good Morning!
The answers to your question depends on who is asking. My house, my parents and sister help me buy it and we got a great deal on it. My clothes I never buy unless its on sale and then I only shop at one – three stores at the most I just don’t like shopping and my car not many people have asked and if they do I just tell them I really don’t know but what I do tell them that it is paid off
June 29, 2010 at 9:33 am
I hope I wasn’t coming across as nosy or anything, but I’ve spent the last year or so asking friends and family how much they pay for things like rent, hydro, internet service, etc. I’m about to strike out on my own after school and it’s very helpful to have a good idea of how much ‘life’ will cost me and how much I should save for bigger ‘move-out’ purchases.
June 29, 2010 at 9:45 am
Whether the asker is a relative, friend, acquaintance or co-worker, the question is inappropriate. It’s non of his/her business unless the purchaser volunteers the info without being asked. Maybe there’s a real bargain out there that you’d like to share. One good response, if you want to stop the questioning is, “Why would you ask me such a rude question?” You’re not saying the asker is rude, although they are certainly nosy, but you are making it clear that the question is not appreciated.
June 29, 2010 at 9:51 am
Maybe I overshare, but if people ask, I tell. I also find it hard to deceive or to be dishonest. If I thought that the person who was asking would feel badly about themselves for not being able to afford it, I might downplay the price, and overplay how much I saved (cause I never buy ANYTHING that wasn’t on sale).
And, Christina, you need to ask around what people are spending on things in order to know what things cost and set up a budget… I’ve been doing that a LOT about how much coworkers are paying for their children’s university tuition, because otherwise, how do you know how much to save? The average answer was $6000 to $25 000 per year, depending on whether they lived at home, and whether they moved out of province. That gives me a rough idea of how much to save to start with, and for my daughter to know what she will need to consider in determining where she goes to university, and how much she may have to be responsible for.
June 29, 2010 at 10:00 am
I honestly feel that if I feel a bit of guilt admiting what I paid for something I probably over paid. I usually have no issue telling the asker what I paid for something unless I question the motive behind the question. In which case I usually just say sorry, that’s for me to know and you to not worry about.
Question about bonds though. My employer offers the oppurtunity to but into Federal government bonds but the information that we are given is a bit vague. Yes it tells you that the bond is like a loan to the Feds and you get interest on it but I cannot seem to find information on the maturity date, current interest rates or the past preformance of it. Any suggestions?
June 29, 2010 at 10:26 am
I was just thinking about bonds yesterday. I don’t have any and I don’t know much about them, but I was considering them as a long-term investment where my money would be safe, so I checked out the current Canada Savings Bonds rates — and they are CRAP!! 0.4%!!! I’m just going to keep my money in my ING savings account.
man, I was disappointed =(
June 29, 2010 at 10:34 am
@ lis – standard buffet investing rule applies: Never (NEVER) invest in anything you don’t understand. If they’re not being forthcoming with information, then find out why but to me that’s a huge red flag.
June 29, 2010 at 11:02 am
Sticky question – I don’t normally have a problem telling people how much I paid for things, unless I think it will make them feel bad. Or if it is my ex-husband asking, I will tell him flat out it is none of his business, what I do with my money has nothing to do with him. He doesn’t manage his funds well, so is often scrounging for cash, and is often quite jealous of what I do. I think that is the difference, if it is someone that is just curious that’s fine, if it is someone who is asking out of jealousy that’s something completely different, and I have no problem telling them that it isn’t any of their business. I’m pretty upfront about things in general.
June 29, 2010 at 11:11 am
I’ve only ever once been uncomfortable with a money question and that was when I was asked by a struggling colleague how much I make per hour at my other job. I gave the salary range as understood what the motivation of the question was. When people have shared their financial info with me I’ve found it helpful for eg: housing costs in the area, property taxes, cost of extra-curriculars and so on and have always shared with others if asked or if I can see they’re looking for information but trying not to ask directly for fear of being rude. I think the money taboo thing is too bad but then I don’t care what people think of how much I pay, where I direct my earnings. Way I see it we’re all on a different path and if we can help make it smoother for someone else we’ll all be the better off for it. There’d be a lot less stress around the holiday season if people understood each other’s financial situations better.
June 29, 2010 at 11:16 am
I look forward to hearing more about fixed income investments, they are my personal favourite.
Sticky question:
I am one of those Canadians that usually proudly says how much I paid (and where and when) so that they may also get the good deals! I’m not shy about admitting that things are bought second hand or hand-me-downs from my sister. However if the person is asking about something major, I usually say “not more than we could afford” or “we are happy with what we got for the price” or “enough”.
June 29, 2010 at 11:23 am
Like many other coworkers, there is little that I’m shy about when it comes to money. If there is something that I don’t want to share, I go back to my old standby when others in school would ask me what my mark was and I didn’t feel like sharing, “I am pleased with the mark I got/the price I paid”. Most people take the hint with that kind of non-answer.
June 29, 2010 at 11:56 am
Sticky Situation: If the person asking wants the information to help improve their lives or situation, I’ll tell them what I paid and how I saved up for it. If they’re just being nosy (and those people are never relatives), I lie. If they want to one-up me, I give a really high price. If they want to feel better about themselves because of how “poor” I am, I give them a low price. Whatever shuts them up the fastest.
June 29, 2010 at 12:35 pm
I have no issue telling anyone who asks, what something costs or how much I make. It is no big deal to me who knows. I have never understood all this secrecy around money whether it be spending or earning. Moneymakes the world go round and the more open it is, the less likely people are to hiding secrets which may bring problems down the road.
June 29, 2010 at 1:00 pm
Re: what I have paid for stuff – mostly have no problems telling people what things cost. Although, I have had a problem telling people the cost of my bathroom reno because I think we paid too much (but we are happy with it).
I do have a problem telling people what we earn – more so scared they will want to borrow money – and I would have to say no – I have had bad experiences with loaning (turned out to be giving) money to others.
June 29, 2010 at 3:48 pm
Sticky situation:
“More than I would like but I am happy with the deal”
“That is none of your business” (call me rude if you want)
“You can expect to pay around $x for this type of stuff” (used when I think someone is trying to learn)
“I got it at 50% off!” (I like to brag every now and then)
If you want to learn without seeming nosy, ask how much that type of stuff/work costs. It makes it less personal and indicates that you do not want to know down to the last penny.
June 29, 2010 at 4:37 pm
I’ve heard that the bond market is related to the interest rate offered by banks for mortgages. Now that I know how the bond market works for a consumer, does anyone know how this is related to mortgages?
June 29, 2010 at 4:38 pm
Oh, and why be afraid to talk about money? That’s a part of what gets us into debt?
June 29, 2010 at 5:38 pm
Sticky question response—-
“you would have to ask my hubby, it’s one of the payments he makes” or I make it sound like an awesome deal if it is on little things like clothes, etc. Makes them jealous that I got a good deal or it’s not a payment that I need to worry about. It’s really nobody’s business, right?
June 29, 2010 at 9:15 pm
Sticky Situation – for clothing, shoes, etc I share the great price that I paid (since it would have to be a good deal!) For major purchases I would never share the exact price (except to my realtor); I would tell them that we negotiated a great price or in the case of a car – “it was more than I would have liked to pay”. We were recently asked by a neighbour how much our contractor was charging for one part of a fairly large job, I explained (truthfully) that it was all priced together, I did not know what each project was costing individually.
Wish I could arrange my schedule to came to the picnic, working on it. I think on some dimension that Gail could be a relative. She certainly feels like a sister.
June 30, 2010 at 11:30 am
Sticky Situation Question Answer: What I felt like paying
July 1, 2010 at 8:20 am
Sticky situation: I love to talk about money and the price of things so if someone were to ask I would just tell them and where I got it from as well.
July 6, 2010 at 4:32 am
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