With investors' fascination in the equity markets, influenced by readily accessible news outlets such as CNBC, CNN, and MSNBC, many have long forgotten fixed income securities. However, with strong equity gains also comes volatility, which has some investors looking to preserve capital. Bonds can help to achieve that preservation of wealth and peace of mind.
Bonds provide the means for investors to achieve a predictable flow of income that can be used for everything from educational needs to retirement funding. And for the more risk tolerant investor, bonds can provide a stabilizing effect to a volatile portfolio.
The basis for investing in fixed income securities is quite different from investing in equities, mutual funds or insurance products. The investment in a fixed income instrument is, in its simplest form, an agreement or bond between a borrower and lender. The borrower agrees to pay a fixed rate of interest to the lender and then repay the principal at the maturity date of the loan.
The power of this simple arrangement has some very significant implications to investors. Regardless of the direction interest rates move, the value of a bond is known when it reaches its maturity, and its interest payments remain constant throughout its life (with the exception of bonds affected by prepayments, i.e. mortgage-backed securities, asset-backed securities and CMOs). The value of mutual funds is not fixed by a maturity date.
Of the risks associated with the purchase of a fixed income security, we believe that investors should focus on two. First, investors must consider credit risk, which is the credit worthiness of the borrower and the risk associated with their ability to meet their obligations under the terms of the bond. There are vast numbers of borrowers in the bond market arena. The largest is the United States Treasury, whose obligations are backed by the full faith and credit of the federal government and are considered to have no credit risk. Other borrowers usually pay for a rating service to review their books and assess their ability to pay, providing the investor a basis for making an informed decision. Investors should carefully evaluate the credit of a borrower before investing.
The second major risk an investor must consider is interest rate risk, which is the risk associated with the degree of fluctuation in the price of the bond between the purchase date and the final maturity date. The degree of risk is determined by the characteristics of the bond, such as the coupon rate, maturity date and call date. Generally, the longer the maturity date, the greater the degree of change from interest rate risk on the bond's price. However, the price fluctuation of a bond as impacted by the fluctuations in interest rate changes can be eliminated if the investor holds the bond to its maturity date. At maturity date the investor receives a bond price of par, or 100, such that the investor receives 100% of the face dollar value.
The diverse product selection Morgan Keegan offers includes: corporate bonds, government and agency securities, tax-free bonds, preferred stock, mortgage-backed securities, certificates of deposit, and unit investment trusts. Click on any of the product links to learn more about these investments.
Morgan Keegan is a leading underwriter of municipal bonds in the South and one of the largest underwriters of agency bonds in the nation.
Contact Morgan Keegan today for more information about the different types of bonds we offer.
