Fixed Interest Investments
Fixed interest investments offer investors a regular income for a specified term with the expectation that the principle will be repaid at the end of the term. Fixed interest investments are issued by the Commonwealth government, state governments, semi-government authorities, banks and other corporations, both locally and overseas, to raise capital for projects.
Fixed interest investments usually have longer investment terms than cash investments. Australian bond maturities range from one to 10 years while US bonds can extend up to 30 years. There are two significant benefits of fixed interest investments in that they can provide a buffer against volatile share markets, lowering risk, when held in a diversified portfolio and it provides opportunities for enhanced returns without resorting to lower grade, higher risk debt.
Fixed interest examples:
- Corporate Bonds: issued by large public companies to fund expansion and other major projects
- Government Bonds: issued directly by a government and are explicitly guaranteed
- Semi-Government Bonds: not issued directly by a government but might have a direct or implied guarantee Capital notes
- Hybrids - have characteristics of both equity and fixed interest securities
Benefits of fixed interest
Fixed interest is a low to medium risk investment suitable for investors with a timeframe of three years or more. In addition to providing a regular income stream - an important feature for many investors - fixed interest can provide a stabilising effect during periods of share market volatility.
As their name suggests, fixed interest securities make regular interest payments. Interest rates can be fixed or floating. Fixed rates are set for the life of a security, while floating rates are reset periodically.
Risks of fixed interest
While fixed interest investments are generally secure, like all investments, there are risks involved. For example, like shares, fixed interest investments are not guaranteed. If the issuing company fails, investors may lose all or part of their initial investment.
It’s important to remember however that some fixed interest investments, such as corporate bonds, generally rate higher than shares in the issuing company’s credit structure and therefore where an issuing company is wound up, have priority in any return of capital to investors.
