Fixed income trade comes in a range of investment options and with a range of investment risks. For our purposes, we’ll be discussing municipal bonds (government bonds) and the corporate bonds market. Fixed income options can include mutual bond funds and fixed income ETFs as well as individual bonds.
Fixed income instruments are generally considered to be lower risk investment options than trading on the stock market. However, fixed income investment doesn’t come without risk and bondIT has been designed to assist with fixed income portfolio management and credit risk analysis, developing optimized investment strategies in a matter of minutes as well as rebalancing options and optimal bond allocation strategies.
Investors all have individual investment objectives which are determined by things like age, employment, income goals and bondIT has been specifically developed to ensure that whatever your investor objectives are, we can help you construct an optimized portfolio to meet and exceed them. For example, bondIT delivers recently developed a game-changing advanced laddering. Whether you’re building standard or custom ladders of municipal, corporate, and government bonds, bondIT aligns optimal portfolio construction with client-specific needs, marking a critical advancement in modern wealth management businesses. With bondIT, you can custom-immunize pre-retirement liabilities such as a down-payment on a home or vacation property, children and grandchildren’s college tuition. For post-retirement clients, asset accumulation shifts to decumulation, and wealth management’s focus shifts to generating efficient income distribution throughout retirement. bondIT’s income ladder tool has been designed to include the flexibility to generate bond ladders and income streams in whatever frequency and the amount a client requires.
How do bonds generate income?
But what is a bond? How do they work and how do they generate income? A fixed income bond is a debt security issued by either a private corporation or a government organization such as the U.S. Treasury. An organization will issue a bond when they’re looking for cash flow investment. The investor will purchase a bond for a set bond price and either a fixed or floating interest rate. For example, if a bond is priced at $100 with an interest rate of 10%, the investor purchases the bond for $100 on the provision that the bond issuer will pay interest on that capital investment regularly in the form of interest payments (also known as coupon payments) until the bond matures. At the bond’s maturity date, the bond issuer returns the capital investment amount. Fixed income instruments work similarly to a fixed term deposit except for the ability to buy and sell a bond before its maturity date is reached.
Government bonds are among the least risky investment-grade bonds but that doesn’t mean they are immune from risk entirely. Credit ratings generally determine the investment risk a bond poses and governments like the U.S. Government usually have excellent creditworthiness. Because the risk of default is so low the interest earned on the bond will also generally be quite low. When interest rates are high, bond investing is at its optimal. The higher the interest rate, the higher the income potential on a bond. Government bonds can be called early if the federal reserve decides to lower interest rates and then issued again at the new, lower rate. Interest rate risk is one of the risks facing investors interested in investing in government bonds. Inflation risk is the other risk investors can face when investing in fixed income securities. This occurs when the rate of inflation is equal to or larger than the interest rate percentage offered on the bond. It effectively means that the income generated on the bond is lower than the projected value of the bond when it was purchased.
The most attractive aspect of investing in government bonds is that many of these types of bonds are offered as tax-exempt. However, changing governments can affect tax-free bonds, changing their status either way. A bond that was initially tax-free but then becomes taxable will lose value in the bond market. These types of bonds can be sold on the secondary market but at a considerably lower value than the original purchase price.
The corporate bonds market is riskier than government bonds but there are still investment-grade corporate bonds to buy. As with government fixed income bonds, fixed income risk is determined by the creditworthiness of the bond issuer. The yield of corporate bonds can be high but fixed income high yield bonds come with high risk too. Junk bonds, or non-investment grade bonds, are bonds issued by corporations with a low credit rating. Just like personal credit, the interest rate offered to applicants is determined by the risk of default on the loan. So, junk bonds are typically offered with attractive looking interest rates, but liquidity risk means that if the worst occurs and the corporation is insolvent, the investor loses out not only on the interest payments of their bond but possibly fails to recoup their capital investment. Financial administrators typically sell of an insolvent company’s assets and use the funds to settle outstanding debts with creditors. There may not be enough funds to fully repay bond amounts.
It is the role of the portfolio manager and the financial advisor to develop diversified investment portfolios for their clients which balance the risk of income loss against the potential yield of investment options and bondIT assists with automated portfolio optimization, delivering investment proposals in a matter of minutes. bondIT is capable of generating instantly compliant investment proposals developed to meet the needs of individual clients, regardless of where their investments goals are and what kind of income they are looking for. Our asset management platform is data agnostic and can be integrated with any enterprise management software.
If you would like to discover how bondIT can increase your business efficiency and reduce wasted time and costs, contact our team today.
