Let’s start with the basics of fixed income.

Fixed income investments get their name because they're usually designed to generate a specific, or "fixed," level of interest income. Common fixed income investments include Treasury bonds, government and agency bonds, municipal bonds, corporate bonds, and mortgage-backed securities, as well as certificates of deposit and preferred stock or securities.

Understand the different types of securities.

  • Individual bonds

    Bonds typically pay a set schedule of fixed interest payments and promise to return your money on a specific maturity date. They are issued by a variety of entities, such as the U.S. Treasury, government agencies, corporations, and municipalities.

    Schwab gives you access to over 50,000 individual bonds from more than 200 dealers.1

  • Bond funds and exchange-traded funds (ETFs)

    Bond mutual funds and bond ETFs are professionally managed investment products made up of a diversified mix of underlying securities. Many have low investment minimums.

    Through Schwab, you can access over 800 no-load, no-transaction-fee bond funds through Mutual Fund OneSource® or over 30 bond ETFs that trade commission-free online in Schwab ETF OneSource™.2

  • Certificates of deposit (CDs)

    CDs are bank deposits that pay a stated amount of interest for a specified period of time and promise to return your money on a specific date. CDs are insured by the FDIC, which provides an added level of safety.

    You can find and manage high-yield CDs through Schwab CD OneSource®.

  • Preferred stocks/securities

    Preferred stocks/securities are a class of stock that must pay dividends or interest to preferred shareholders before dividends are paid to common stockholders. They are issued by corporations and have attributes that are characteristic of both stocks and bonds.

    Schwab gives you access to hundreds of new-issue and secondary market preferred stocks/securities.

  • Managed accounts

    A managed account is a portfolio of individual securities that you own. The securities are chosen and managed on a discretionary basis by an asset management firm.

    Each professionally managed account follows a focused strategy within a specific asset class or investment style.

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.

  • Diversification

    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.

  • Income generation

    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:

    Individual bonds

    Pros:

    • 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

    Cons:

    • Require more involvement to research, choose, diversify, and monitor

    Bond mutual funds and bond ETFs

    Pros:

    • Are great for diversifying holdings

    Cons:

    • 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
  • Capital preservation

    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.

  • Tax exemptions

    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:

    1. 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.
    2. Treasury securities and some federal agency bonds pay interest that is generally exempt from state income taxes.
    3. 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.