Fixed-Income Securities

A conventional fixed-income security is a product with a pre-established income, maturity date and value. This investment category therefore includes bonds, debentures, money-market securities, and mortgage securities. Through fixed-income securities, companies borrow money to finance a deficit, obtain leverage or allocate company-incurred expenses over a longer period.

The difference between a bond and a debenture lies in the security provided. A bond can be secured by physical assets set out in the trust deed included in the bond contract. It is therefore possible for the bondholder to seize these assets and sell them to recover the amount of his investment. A debenture is generally secured only by various protective clauses, residual equity and the issuer’s creditworthiness. It is not secured by any physical assets.

Bonds are issued in denominations. They may be purchased, for example, at a price of $989.52 but are more frequently issued in $1,000 and $10,000 denominations. A bond yields interest income, just as certain stocks yield dividends. This interest may be paid monthly, semi-annually or annually.

All bond prices are expressed in accordance with an index that has a basis of 100. When a bond is traded at 100, it is traded at par, or at its face value. When a bond is traded at 99, it is traded below par, at 99% of its face value of 100. Conversely, when a bond is traded above par, its price is higher than its par value of 100.

Risk Level

Among the fixed-income securities, government-guaranteed bonds are the least risky. However, these investment vehicles are subject to certain risks owing to interest-rate volatility, inflation, market growth, and new trading strategies. When interest rates decrease, their price increases, but when interest rates increase, their price decreases.

The issuer’s creditworthiness may be checked through the Standard & Poor's and the Dominion Bond Rating Service in Toronto, which attribute a rating to issuers of fixed-income securities in order to assess their quality. The higher the rating, the safer the security. Your investment advisor can give you more information.