Take a closer look at the benefits.
There are four key features to fixed income securities that make them desirable to investors: diversification, capital preservation, income generation, and potentially favorable tax treatment. Each feature provides a unique set of benefits that vary depending upon the type of fixed income security.
Fixed income securities, specifically high-credit-quality bonds, can help smooth out the highs and lows in a stock portfolio. That’s because stock and bond prices have historically tended to move independently and with different magnitudes at any given time. However, diversifying with bonds does not ensure a profit and does not protect against a loss in a declining market.
Fixed income securities are typically designed to provide a regular, predictable stream of interest payments on set dates. Keep in mind that there is a risk that the issuer will not make good on the promise to pay interest income.
There are three common choices for generating income:
- Offer you control over what type of income you can expect to receive, and when
- Have payment dates that can be staggered to help create more regular monthly income
- Can be “laddered” to help manage liquidity and interest rate risk
- Require more involvement to research, choose, diversify, and monitor
Bond mutual funds and bond ETFs
- Are great for diversifying holdings
- Have income distributions that can fluctuate
- Generally have no stated maturity date, so shares must be sold to get back the principal
- Can have a potential loss of principal if they're worth less than they were when you bought them
Fixed income securities are ideal when preservation of capital is a priority. Specifically with bonds, principal is usually returned at a set maturity date. Higher-quality fixed income investments, like Treasuries and CDs, have the best potential for protecting principal. Though preserving capital is a key feature of fixed income securities, there is still the risk that the issuer of the bond will not make good on paying back the principal.
Some fixed income securities have preferential tax treatment where coupon payments may be exempt from federal and state income taxes.
Keep in mind that potential tax advantages are generally factored into the price of any bond (and therefore its yield). Also, tax-exempt bond income may be subject to the alternative minimum tax (AMT), and capital gains are subject to federal and sometimes state and local taxes. Schwab recommends consulting a qualified tax advisor for specific individualized tax advice.
Tax treatment is not the same for all types of bonds:
- Municipal bonds may have the greatest potential tax benefit because their interest payments are usually exempt from federal income and are potentially exempt from state income taxes for investors buying bonds issued in their home state.
- Treasury securities and some federal agency bonds pay interest that is generally exempt from state income taxes.
- Bond funds and bond ETFs that invest in securities whose interest is exempt from income taxes, like municipal bonds and Treasuries, generally pay interest that is exempt from income taxes, just like the individual bonds they own.
Schwab gives you access to the resources and tools you need.
Search bonds, manage your choices, explore strategies, and get answers to questions that can help you make decisions.
Easily search and manage fixed income investments.
Streamline your search for fixed income investments and simplify the management of your trade decisions and portfolio with our easy-to-use Fixed Income Resources.
Set up a bond ladder strategy.
Bond ladders are designed to create a predictable income stream and maturity schedule. This strategy can help you minimize exposure to interest rate fluctuations.
Get answers to common fixed income questions.
Browse our FAQs to get the information many investors like you are asking about.
Avoid the three common errors that investors make.
Keep your bond strategy on course by understanding how to avoid the most common investing errors: chasing yield, buying and forgetting, and failing to diversify.
Learn more about the three common errors investors make.
Specialized help to get the answers you need.
Talk with a Schwab Fixed Income Specialist for personalized assistance with your fixed income investing questions and pricing—call 877-906-4670.
We're here to help
Clients of independent investment advisors: You may also contact your advisor or call Schwab Alliance at 800-515-2157.
1. Availability on Schwab BondSource® as of January 2016.
2. Conditions apply: Trades in ETFs available through Schwab ETF OneSource (including Schwab ETFs™) are available without commissions when placed online in a Schwab account. Service charges apply for trade orders placed through a broker ($25) or by automated phone ($5). An exchange-processing fee applies to sell transactions. Certain types of Schwab ETF OneSource transactions are not eligible for the commission waiver, such as short sells and buys to cover (not including Schwab ETFs). Schwab reserves the right to change the ETFs we make available without commissions. All ETFs are subject to management fees and expenses. Please see the pricing guide for additional information. Investment returns and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost.
Restrictions apply: Online trades of Schwab ETFs are commission-free at Charles Schwab & Co., Inc. (Member SIPC), while trades of certain third-party ETFs are subject to commissions. Broker-assisted and automated phone trades are subject to service charges. Waivers may apply. See the Charles Schwab Pricing Guide for details. All ETFs are subject to management fees and expenses. An exchange-processing fee applies to sell transactions.
Schwab’s short-term redemption fee of $49.95 will be charged on redemption of funds purchased through Schwab’s Mutual Fund OneSource® service (and certain other funds with no transaction fees) and held for 90 days or less. Schwab reserves the right to exempt certain funds from this fee, including Schwab Funds®, which may charge a separate redemption fee, and funds that accommodate short-term trading.
Trades in no-load mutual funds available through the Mutual Fund OneSource service (including Schwab Funds), as well as certain other funds, are available without transaction fees when placed through Schwab.com or our automated phone channels. For each of these trade orders placed through a broker, a $25 service charge applies. Schwab reserves the right to change the funds we make available without transaction fees and to reinstate fees on any funds.
Charles Schwab & Co., Inc., Member SIPC, receives remuneration from fund companies participating in the Mutual Fund OneSource service for recordkeeping and shareholder services and other administrative services. Schwab also may receive remuneration from transaction fee fund companies for certain administrative services.
Charles Schwab & Co., Inc. receives remuneration from third-party ETF companies participating in Schwab ETF OneSource for recordkeeping, shareholder services, and other administrative services, including program development and maintenance.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.
Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Certificates of deposit available through Schwab CD OneSource typically offer a fixed rate of return, although some offer variable rates. They are FDIC-insured and offered through Charles Schwab & Co., Inc.
Tax-exempt bonds are not necessarily a suitable investment for all persons. Information related to a security's tax-exempt status (federal and in-state) is obtained from third parties, and Schwab does not guarantee its accuracy. Tax-exempt income may be subject to the alternative minimum tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.
Investments in managed accounts should be considered in view of a larger, more diversified investment portfolio. Fees charged for managed accounts are in addition to other fees.