focus on fixed incomefocus on fixed income focus on fixed income is a 45-minute educational program...

Focus on Fixed Income

of 20 MKD-3360H-A-PW EXP 31 JUL 2021 © 2019 EDWARD D. JONES & CO., L.P. ALL RIGHTS RESERVED.

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Focus on Fixed IncomeFocus on Fixed Income is a 45-minute educational program for people who are interested

in creating a reliable income stream. Focus on Fixed Income covers bond characteristics and

features as well as key strategies to get the most out of one’s fixed-income investments.

Seminar ContentsKey Steps to Financial Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Setting the Fixed-income Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Common Bond Characteristics

Issuer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Maturity Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Call Feature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Interest Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Investing in Bonds

Importance of Fixed Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Bond Laddering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Developing Your Fixed-income Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Answer Key . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Welcome – and thank you for taking the time to attend our seminar today. Each of our

seminars is designed to help you become a more educated investor and to assist you on

your path toward reaching your individual financial goals.

As unique as these goals may be, we believe the five Key Steps to Financial Success

provide a clear and balanced path to reaching them.


1WHERE

AM I TODAY?

2WHERE

WOULD I LIKE TO BE?

3CANI GET

THERE?

4HOW DO

I GET THERE?

5HOW CAN I STAY ON TRACK?

MY FINANCIAL

NEEDS

®

Key Steps to Financial Success

LOAN VS. OWN

Loan investments are when you lend someone your money for a specified period of time. In

exchange, you receive interest payments and, at maturity, your principal back.

Own investments are when you use your money to purchase something. In exchange, you

may receive dividends, and you hope for the value of what you own to grow.

Setting the Fixed-income Foundation

Three Things You Can Do with Your Money

GIFT INVESTSPEND


LOAN VS. OWN

Mark an X under the appropriate heading of Own or Loan for each investment type.

Investment Type Own Loan

Collectibles

Certificates of Deposit

Stocks

Bonds

Real Estate

Money Market Fund

Precious Metals

Businesses

Checking Account

Setting the Fixed-income Foundation (cont.)


ISSUER

A legal entity that issues a bond to finance a debt.

An issuer can be:

• A government entity

• A municipality

• A corporation

The issuer is responsible for making timely

interest payments and returning your principal

when the bond matures.

Common Bond Characteristics

Issuer

Maturity Date

Call Feature

Interest Rate

Price

Rating

Taxation


MATURITY DATE

The time when your principal investment will be

paid back to you.

• Bond maturities typically range from as little as

one month to as long as 30, 40 or 50 years.

• In general, the longer the maturity, the higher

the interest rate.

BOND MATURITIES

Short term (up to 5 years)

Intermediate term (6 to 15 years)

Long term (16 years or more)

Issuer

Maturity Date

Call Feature

Interest Rate

Price

Rating

Taxation

Common Bond Characteristics (cont.)


CALL FEATURE

The issuer’s ability to buy back the bond prior

to the stated maturity date.

When a bond is called before its stated maturity

date, it could cause you to:

• Lose the regular interest payment

• Reinvest that money when interest rates are lower

An issuer will often call a bond if it is paying a

higher rate than current market interest rates so

that it can issue a new bond at a lower rate. This is

similar to homeowners refinancing a higher-interest

mortgage for a lower-interest one.

Issuer

Maturity Date

Call Feature

Interest Rate

Price

Rating

Taxation



Issuer

Maturity Date

Call Feature

Interest Rate

Price

Rating

Taxation

INTEREST RATE

The amount of interest you receive until the bond matures

or is called by the issuer.

Fill in the blanks.

The payment of an interest rate is called a

and is expressed as a percentage of the

bond’s face, or par, value.

The amount of money a holder will get

back once a bond matures is called its

.

Example:If a bond pays a coupon of 5% and its

principal value is $10,000, then it will pay

$500 in interest a year. If the interest is

paid semiannually, then you will receive

$250 twice a year.

If your bond is not callable, you will earn the stated interest

rate for the life of the bond, regardless of changes in the

economy.



Issuer

Maturity Date

Call Feature

Interest Rate

Price

Rating

Taxation

PRICE

The amount you pay for a bond. Most bonds are

sold with a $5,000 minimum and in increments of

$1,000 or $5,000 thereafter.

Important facts about bond prices:

• The price of a bond is affected by the changing

level of interest rates.

• There is an inverse relationship between bond

prices and interest rates. When interest rates go

up, bond prices tend to decline, and vice versa.

• The rise or fall of your bond’s value is only

important if you sell your bond prior to maturity.

Examples of premium and discount prices:

A bond at a premium is selling for more than par.

A price of 105 means the bond is selling for 105%

of par value. 1.05 x $10,000 = $10,500

A bond at a discount is selling for less than par.

A price of 95 means the bond is selling for 95%

of par value. 0.95 x $10,000 = $9,500

No matter how much the price of a bond fluctuates,

if you hold it to maturity or until it is called, you

should receive your full principal back.



Issuer

Maturity Date

Call Feature

Interest Rate

Price

Rating

Taxation

RATING

Measures the ability of the issuer to make interest

payments and repay the principal at maturity.

Bonds with higher ratings are less likely to default

and therefore more likely to return your principal

when they mature.

BaB

CaaCaC

AaaAaA

Baa

Moody’s

BBB

CCCCCC

AAAAAA

BBB

Fitch

BelowInvestment

Grade(High-yield or“Junk” Bonds)

InvestmentGrade

BBB

CCCCCC

AAAAAA

BBB

S&P

LowerQuality

HigherQuality



Issuer

Maturity Date

Call Feature

Interest Rate

Price

Rating

Taxation

TAXATION

Tax-free municipal bonds can help provide a source

of income that’s free from federal and possibly even

state and local taxes. Interest on corporate and most

other bonds is taxable. Some bonds may be subject

to the alternative minimum tax, or AMT.

TAXABLE-EQUIVALENT YIELD

The taxable-equivalent yield is the interest you

would need to earn on a taxable bond to equal the

yield of a tax-free municipal bond.

Depending on the issuer and your state of residence, bonds may be taxable or tax-exempt.

Marginal Tax Rate

10% 12% 22% 24%* 32%* 35%* 37%*

Tax-free Yield Taxable-equivalent Yield*

2.00% 2.22% 2.27% 2.56% 2.77% 3.12% 3.27% 3.38%

3.00% 3.33% 3.41% 3.85% 4.16% 4.67% 4.90% 5.07%

4.00% 4.44% 4.55% 5.13% 5.54% 6.23% 6.54% 6.76%

5.00% 5.56% 5.68% 6.41% 6.93% 7.79% 8.17% 8.45%



Source: Edward Jones. This example does not represent currently available rates and does not illustrate the effect of state and local taxes or the alternative minimum tax (AMT).

*These yields include the 3.8% Affordable Care Investment Tax in addition to the Marginal Tax Rate where applicable.

IMPORTANCE OF FIXED INCOME

Fixed-income investments are important because they:

• Can help create a reliable stream of income

• Help reduce overall portfolio risk

• Help preserve investment principal

THREE FUNDAMENTALS OF INVESTING:

While everyone should consider owning income investments, the amount will

vary depending on the investor’s situation, life stage and risk tolerance.

Diversify1

Buy Quality2

Invest for the Long Term3

Investing in Bonds


DIVERSIFICATION

A strategy to help reduce investment risk by putting funds in several investment categories.

Circle the correct answer.

More than 90% of the variability of an investment portfolio’s return is the result of:

A. Timing the market

B. Security selection

C. Overall asset allocation

D. All of the above

Fill in each level of the investment pyramid with the appropriate investment type.

Although bonds play an important role in your investment portfolio, it’s your overall

mix of investments – asset allocation – that ultimately helps determine how well your

portfolio may perform.

Investing in Bonds (cont.)


Diversification does not ensure a profit or protect against loss in a declining market.

BOND LADDERING

Purchasing bonds with a variety of maturities,

from short term to long term.

Laddering helps reduce income fluctuation. If one

bond matures during a time when interest rates are

low, other bonds can still be providing income.

Benefits of Bond Laddering:1. Stability2. Flexibility3. Diversification

Short term (up to 5 years)

Intermediate term (6 to 15 years)

Long term (16 years or more)

Investing in Bonds (cont.)


You must evaluate whether a bond ladder and the securities held within it are consistent with your investment objectives, risk tolerance and financial circumstances

Action Plan Examples

48 hours Schedule a date with your spouse or significant other to review your household finances.

Week Gather all your financial accounts and statements. Be sure to include any savings bonds or CDs so you have a full picture of your current level of fixed income.

2 weeks Schedule an appointment with a financial advisor to review your investments and determine the appropriate amount of fixed income for you.

Month Begin creating a bond ladder, accounting for such factors as bond ratings, taxable-equivalent yields, call features and interest payment dates.

3 months Continue to add to your bond ladder as needed. Consider setting up a central account where your income can be automatically deposited.

Each year Review your strategy to see if you are on target to reach your goals or if adjustments need to be made.

MY ACTION PLAN

Do you have the right amount of fixed income in your portfolio? Take advantage of the strategies we discussed today to help build a steady income stream, diversify your portfolio and help protect your wealth.

Goal: _________________________________________________________________________

What can I do in the next:

48 hours ______________________________________________________________________

Week _________________________________________________________________________

2 weeks _______________________________________________________________________

Month ________________________________________________________________________

3 months ______________________________________________________________________

Each year _____________________________________________________________________

Developing YourFixed-income Strategy


PAGE 9

The payment of an interest rate is called a coupon and is expressed as a percentage of the

bond’s face, or par, value.

The amount of money a holder will get back once a bond matures is called its par value.

Investment Type Own Loan

Collectibles X

Certificates of Deposit X

Stocks X

Bonds X

Real Estate X

Money Market Fund X

Precious Metals X

Businesses X

Checking Account X

Answer Key


More than 90% of the variability of an investment portfolio’s return is the result of:

C. Overall asset allocation

Source: “Determinants of Portfolio Performance II: An Update,” Gary P. Brinson, Brian D. Singer and Gilbert L. Beebower, Financial Analysts Journal, 1991. Past performance is not a guarantee of future results. Diversification does not guarantee a profit or protect against loss.

The appropriate investment type for each level of the investment pyramid:

Aggressive

Growth

Growth and income

Income

Cash

Answer Key (cont.)


Alternative Minimum Tax (AMT) – A separately calculated tax created by the IRS to ensure

that high-income individuals, corporations, trusts and estates pay at least a minimum amount

of tax, regardless of deductions, credits or exemptions.

Bond Laddering – Purchasing bonds with a variety of maturities, from short term to long

term.

Call Feature – The issuer’s ability to buy a bond back prior to its stated maturity date.

Certificates of Deposit (CDs) – Savings instruments issued by banks and savings and loans.

CDs offer a variety of maturities and interest payment options.

Corporate Bond – A loan to a corporation. The corporation pays interest on the number of

bonds purchased. On the maturity date, the corporation returns the investor’s principal.

Coupon – The payment of an interest rate expressed as a percentage of the bond’s par value.

Default – The failure of an issuer to make timely payments of interest and principal as they

come due.

Discount Bond – A bond selling at a price below par value.

Diversification – A method to help reduce investment risk by putting funds in several

investment categories (e.g., growth, growth and income, and income).

Fixed-income Investments – Investments that pay interest at specified times in fixed amounts

and are usually issued by a corporation, municipality, government or government-sponsored

agency.

Interest Rate – The amount of interest received until a bond matures or is called by the issuer.

Investment Grade – A ratings designation indicating that the issuer is considered able to meet

its obligation, thereby exposing bondholders to minimal default risk. Investment-grade bonds

are rated BBB (or equivalent) or above.

Issuer – A legal entity that issues a bond to finance a debt. It can be a government entity, a

municipality or a corporation.

Glossary


Maturity Date – The date the principal investment is paid back to the investor.

Municipal Bond – Fixed-income investments issued by villages, cities, counties, states, state

agencies or special districts. Tax-free municipal bond income is free from federal income tax

and, in some cases, state and local income tax.

Par Value – The amount of money a bondholder will get back once a bond matures.

Premium Bond – A bond selling at a price above par value.

Rate of Return – The ratio of money gained or lost on an investment relative to the amount of

money invested.

Rating – The measure of an issuer’s ability to make interest payments and repay principal at

maturity. Also referred to as credit quality.

Taxable-equivalent Yield – The interest rate a taxable bond must earn to equal the tax-free

yield of a municipal bond.

Glossary (cont.)


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