The Basics – Some Fixed Income Terms Explained

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The Basics – Some Fixed Income Terms Explained

What is a bond?

Companies often need to raise external funds to grow. There are two ways they can do this:

  1. Raise equity by issuing shares
  2. Take on debt by borrowing money

Practically all companies use banks to borrow, but companies can also by-pass the banks and borrow from investors by issuing bonds.

A bond is a debt security that pays a defined interest payment (known as a coupon), for a given time (the term) and repays the face value of the bond at maturity (typically $100).

Issuers of bonds include governments, financial institutions and corporations. Each bond will have a prospectus or information memorandum, outlining the specific details of the bond. These can vary greatly and include, the issuer, the term, call dates, maturity, coupon type, level of subordination and currency.

What is Fixed Income?

Fixed income refers to any type of investment that pays a regular payment over an agreed term and returns principal at maturity. Examples include term deposits, bonds and hybrids. There are also fixed income ETFs and managed funds.

What is a hybrid?

Hybrids are a blend of characteristics of a bond and share. Like a bond they have a known, regular interest payment called a distribution. Like a share, they sit low in a company’s capital structure and are deemed ‘loss-absorbing’ instruments, which under certain conditions, convert to shares to help protect the survival of the institution.

Typically, returns are higher than a bond but lower than the share in the same company.

What is an investment bond?

An investment bond is not a fixed income security, rather a life insurance policy that can invest in a range of securities. Investment bonds are long term investments that can offer tax benefits.

An investment bond is designed to be held for at least 10 years. You can make additional contributions over the life of the insurance bond. To make the most of the tax benefits, each year you can contribute up to 125% of your previous year’s contribution.

See ASIC’s MoneySmart website for more information

What is a managed fund?

Investors pool their funds together and pay a manager to administer the funds for them. Collectively, they can access a greater range of investments and benefit from professional oversight. Fees vary greatly and can include an outperformance fee.

See ASIC’s MoneySmart website for more information

What is an ETF?

An ETF or Exchange Traded Fund is a group of investments such as shares, bonds or commodities or a mix of investment types that are traded on an exchange. Most seek to replicate an index, although actively traded ETFs aim to outperform an index.

ETFs are a low cost way to access markets that may otherwise be inaccessible and provide exposure to many securities, increasing portfolio diversification.

 

 

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Elizabeth Moran
Editor In Chief
Elizabeth is a nationally-recognised independent expert on fixed income. She has more than 25 years experience in banking and financial institutions in Australia and the UK and has been published in every major Australian newspaper and investment website. Prior to becoming an independent commentator in 2019 she spent more than 10 years as the head of education and research at fixed income broker FIIG Securities. Prior to joining FIIG, Elizabeth worked as an Editor/Analyst for Rapid Ratings a quantitative credit rating agency. She also spent five years in London, three working as a credit rating analyst for NatWest Markets.

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