Fixed Income & Bonds
Fixed income investments generally pay a return on a fixed schedule, though the amount of the payments can vary. Individual bonds may be the best known type of fixed income security, but the category also includes bond funds, ETFs, CDs, and money market funds.
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Bonds make interest payments and repay the principal on a fixed schedule. Interest and principal payments are subject to the creditworthiness of the issuer.
Bond mutual funds invest primarily in individual bonds. Many make periodic dividend payments based on the interest paid by the bonds held in the fund.
Fixed Income ETFs
Exchange-traded funds (ETFs) are baskets of investments that trade as a single unit throughout the day.
Certificates of Deposit (CDs)
CDs offer FDIC insurance,3 providing a guarantee of the invested principal up to certain limits.
Money Market Funds
Money market funds are managed to help preserve your principal by investing in lower-risk debt securities with shorter maturities.
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2. Fidelity commissioned Corporate Insight to study bond pricing, available online, for self-directed retail investors from five brokers that offer corporate and municipal bonds. The study compared online bond prices for over 20,000 municipal and corporate inventory matches between September 2nd and October 6th, 2015. It compared municipal and corporate inventories offered online in quantities of at least $10,000 face or par value. The study found on average that three competitors that bundled their markups or fees into their online bond prices were asking an average of $13.97 more per bond. Corporate Insight determined the average cost differential by calculating the difference between the costs of matching corporate and municipal bond inventory at Fidelity vs. these markup-based firms in the study, then averaging the differences across all of the competitor firms. Hypothetical cost savings of $286 is based on an average size order of $22,000 face or par value bonds and average cost differential of $13 per bond.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.
High yield/non-investment grade bonds involve greater price volatility and risk of default than investment grade bonds.