Types of Taxable Bonds
U.S. Treasury Securities are issued by the United States government and are normally considered the safest of all investments. Because of their safety advantage, government bonds pay somewhat lower interest rates than other fixed income securities. Treasury bonds are issued in a wide range of maturities, from four weeks to 30 years. Generally, they are non-callable and the interest payments are exempt from state and local taxes. The timely payments of interest and principal are guaranteed by the U.S. government. Treasury bonds can be purchased through your financial advisor or directly from the U.S. Treasury.
– Government-sponsored Enterprises are issued by government-sponsored corporations and carry AAA rating.
Major issuers are:
- Fannie Mae (Federal National Mortgage Association),
- Freddie Mac (Federal Home Loan Mortgage Corporation), and
- 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 bonds, 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 CD Disclosure Document(PDF). – Preferred securities offer certain benefits of both stocks and bonds. They are most suitable for investors with long-term time horizons 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.
– Foreign Currency Bonds are issued by corporations and governments, who are looking to expand their market of issuance. In addition to offering bonds in domestic markets and local currencies, governments and companies can also issue bonds in other markets and different currencies. Foreign currency bonds carry additional risks to which domestic bonds are not subject, including currency risk, political instability risk and local market risk. As with any investment, foreign securities should fit within the investor’s stated objectives and risk tolerance, and should be allocated accordingly.
– 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 CMOs 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 us today.
A credit rating of a security is not a recommendation to buy, sell or hold securities and may be subject to review, revision, suspension, reduction or withdrawal at any time by the assigning rating agency. Ratings are subject to change and do not remove market risk.
*Legislation temporarily increasing deposit insurance coverage limits from $100,000 per depositor to $250,000 took effect October 3, 2008, and is currently set to expire December 31, 2013. This means that a $250,000 CD with a maturity date after December 31, 2013, will revert to the $100,000 limit after December 31, 2013. The deposit insurance coverage limits refer to the total of all deposits that an account holder has in the same ownership categories at each FDIC-insured institution. Visit fdic.gov for more information.