Fixed Rate Bonds And Monthly Income
Fixed rate bonds came into existence in the United States in the early 1990s. They were primarily meant for investors who are keen on getting regular income while ensuring that bond issuers get capital in a cost efficient manner. |
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Investors find fixed rate bonds attractive because they offer high yields, fixed income monthly, quarterly or semi-annually, the investor knows the time frame of his investment which can run from one year to forty-nine years, and the bonds are liquid enough so the investor has no problem selling them.
If your fixed rate bond is supplying you monthly income, you need to be aware that you would have to pay tax on that income. In fact, there is no tax benefit associated with the income that is generated by fixed rate bonds.
In addition, investors should be aware that fixed rate bonds come with their own risks. One risk being that certain bonds are callable wherein the issuer can call the bond and repay the principal amount to the investors. This way the investor loses out on future earnings. Other risks associated with these bonds include deferred interest payments and the issuer seeking extension to make the payments.
However, the benefits outweigh the risks associated with the fixed rate bonds. Investors can get high yields without compromising on credit quality of the company. In addition, the bonds help to diversify an investment portfolio.
Many fixed rate bonds give investors monthly income. Based on all past results, it has been seen that income return forms the largest component of the total return. 20-year bonds that matured on March 31, 2009 showed that income was 91.6 percent of the total returns for government bonds, 100 percent for corporate bonds and 94.2 percent for municipal bonds.
And, investors will get their monthly income irrespective whether the market interest rate goes up or down. In fact, interest from fixed rate bonds can help consolidate the total return for an investor when the interest rates are on the rise.
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