Fixed Income

Types of Taxable Bonds

– U.S. Treasury bonds are issued by the United States government, non callable, and are generally considered the safest of all investments. These bonds can be purchased through your financial advisor or directly from the U.S. Treasury.

US government bonds are guaranteed by the US government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. US government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government.

– Agency bonds are issued by government-sponsored enterprises (GSE) and carry AAA rating.

Major issuers are:

• Fannie Mae (Federal National Mortgage Association)
• Freddie Mac (Federal Home Loan Mortgage Corporation)
• Ginnie Mae (Government National Mortgage Association): backed by the full faith and credit of the U.S. government. Subject to market risk

Both Fannie Mae and Freddie Mac are government sponsored entities and operate as public companies. Although both were created by congressional charters, neither is a government agency. Their securities do NOT constitute debt of the United States and are not guaranteed by the federal government.

– Corporate bonds are issued by U.S. and foreign companies. Because these bonds carry more risk than U.S. Treasury bonds, they offer higher yields. Before investing, consult your financial advisor about the bond's call features and credit rating.

– Brokered certificates of deposit (CDs) are issued by financial institutions, such as banks, and are sold directly through brokerage firms like Raymond James. Brokered CDs have characteristices similar to a bond, but they are FDIC insured for up to $100,000 per institution, per beneficial holder. Some retirement accounts may qualify for FDIC insurance coverage of up to $250,000. FDIC insurance coverage does not aply to any principal losses that may be incurred. Consult your financial advisor for more information about the difference between regular bank CDs and brokered CDs. To learn more about Brokered certificates of deposit, please read our Disclosure Document (PDF)

– Preferred securities offer certain benefits of both stocks and bonds. They are most suitable for investors with a long-term time horizon who are interested in a fixed rate of return. Unlike common stocks, most preferred securities are issued with a fixed dividend or interest rate which is typically paid quarterly, and most have a par value of $25 per share. Since most preferred securities are considered debt and are senior to common stock, they enjoy a priority claim over common stock on assets of a corporation in case of a liquidation; however, they are often junior to bond holders. They generally have a much longer term maturity than bonds, and in a number of cases they are perpetual. Some preferred securities are subject to unique risks which include the fact that the issuer may defer interest payments for up to 10 years. However, the investor will be liable for income tax on accrued but unpaid "phantom income." Further, dividend payments are not guaranteed and will only be paid if interest payments on the underlying obligations are made, which are dependent on the financial condition of the issuer. In addition, most preferred securities are callable at the option of the issuer, just like bonds, and may be subject to tax event or special event calls. The market value is sensitive to changes in interest rates. Unlike common stocks, preferred stocks do not have voting rights.

– Mortgage-backed securities (MBS) are issued by government agencies and carry an implied AAA rating. MBSs represent a share ownership in a group of mortgages. When homeowners make their monthly mortgage payments, the interest and principal are used to pay interest payments to MBS investors. These securities are subject to pre-payment risk as well as market and interest rate risk.

A more complex type of MBS is a collateralized mortgage obligation (CMO). The mortgage pool is divided among different classes of investors with corresponding different rates and maturities. The prepayments from mortgages are used to pay off bonds in the order specified in the prospectus. A CMO's yield and average life will fluctuate depending on the actual rate at which mortgage holders prepay the mortgages underlying the CMO and changes in current interest rates.

To learn more about these types of securities contact your financial advisor or use the convenient Office Locator to find our office(s) nearest you today.

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