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6.2 Fixed-income Marketplace

An in-depth guide on the fixed-income marketplace, the rationale for issuing debt securities, different types of fixed-income securities, their characteristics, issuers, and taxation.

The Fixed-Income Marketplace

1 | Describe the Fixed-Income Marketplace and the Rationale for Issuing Debt Securities

Fixed-income securities represent a debt of the entity that issues them, and are often referred to as debt securities. These terms include a promise by the issuer to repay the maturity value, or principal, on the maturity date, and to pay interest, either at stated intervals over the life of the security or at maturity.

In most cases, if the security is held to maturity, the rate of return is fairly certain. Importantly, interest payments received by holders are taxed as ordinary income.

Fixed-income securities available in today’s markets come in many varieties, each serving different borrowing needs and investor demands. Some of the main types include:

  • Bonds
  • Debentures
  • Money Market Instruments
  • Mortgages
  • Preferred Shares

Issuers of fixed-income securities can modify the terms to suit their needs and costs, as well as to provide acceptable terms for various lenders.

Frequently Asked Questions

What are fixed-income securities?

Fixed-income securities are financial instruments that represent a loan made by an investor to a borrower (typically corporate or governmental) that generally pays periodic interest and returns the principal at maturity.

Why do entities issue fixed-income securities?

Entities issue fixed-income securities to raise capital for various purposes such as expanding operations, investing in new projects, or refinancing existing debt.

What are common types of fixed-income securities?

Common types of fixed-income securities include bonds, debentures, money market instruments, mortgages, and preferred shares.

What is the taxation policy for interest earned from fixed-income securities?

Interest payments received from fixed-income securities are generally taxed as ordinary income.

Key Takeaways

  1. Debt Securities: Fixed-income securities are often referred to as debt securities; they include a promise to repay the principal and pay interest.

  2. Types of Fixed-Income Securities: There are various types of fixed-income securities including bonds, debentures, money market instruments, mortgages, and preferred shares.

  3. Taxation: Interest income from fixed-income securities is taxed as ordinary income.

  4. Issuer Flexibility: Issuers can modify terms to meet their funding needs and cater to lender preferences.

Glossary

  • Fixed-Income Security: A type of investment that pays regular income and returns the principal at maturity, such as a bond.
  • Debt Securities: Financial instruments issued by an entity to raise capital, involving a borrowing where the entity promises to repay the principal and interest.
  • Bonds: Long-term debt securities issued by corporations or government entities, typically paying periodic interest.
  • Debentures: Unsecured long-term debt instruments that rely on the issuer’s creditworthiness and reputation.
  • Money Market Instruments: Short-term, liquid fixed-income securities extending up to one year, including treasury bills and commercial paper.
  • Mortgages: Loans secured by real estate property.
  • Preferred Shares: Equity securities that have characteristics of both equity and debt, typically offering fixed dividends.
  • Principal: The original sum of money borrowed or invested, excluding any interest or dividends.
  • Maturity Date: The date on which the principal amount of a fixed-income security is to be paid back.

By understanding the fixed-income marketplace, investors can better navigate financial markets and make informed investment decisions.


CSC® Exams Practice Questions

📚✨ CSC Exam Questions ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck!

## What is a common synonym for fixed-income securities? - [ ] Equity securities - [ ] Derivative securities - [ ] Commodities - [x] Debt securities > **Explanation:** Fixed-income securities are often termed as debt securities because they represent debt of the entity that issues them and include a promise to repay principal with interest. ## What do the terms of a fixed-income security generally include? - [ ] A promise of capital gains without any interest - [x] A promise to repay the maturity value and pay interest either at stated intervals or at maturity - [ ] A guarantee of stock dividends along with the interest - [ ] An option to convert into equity securities > **Explanation:** The terms generally include a promise by the issuer to repay the maturity value or principal, on the maturity date, and to pay interest either at stated intervals over the life of the security or at maturity. ## How are interest payments received from fixed-income securities taxed? - [ ] As capital gains - [x] As ordinary income - [ ] As tax-exempt income - [ ] As passive income > **Explanation:** Interest payments received from fixed-income securities are taxed as ordinary income. ## Which of the following is NOT typically considered a fixed-income security? - [ ] Bonds - [ ] Debentures - [ ] Mortgages - [x] Common shares > **Explanation:** Common shares are equity securities, not fixed-income securities, which typically include bonds, debentures, and mortgages. ## What feature of fixed-income securities often makes their rate of return fairly certain if held to maturity? - [ ] Variable interest rates - [ ] Stock option attachments - [ ] Convertible options - [x] Fixed interest rates and maturity value > **Explanation:** If a fixed-income security is held to maturity, the rate of return is fairly certain because of the fixed interest rates and the promise to repay the principal. ## Why might issuers of fixed-income securities modify the terms of the basic security? - [ ] To avoid paying any interest - [x] To suit their needs and costs and to provide acceptable terms to various lenders - [ ] To convert the debt into equity - [ ] To avoid regulatory scrutiny > **Explanation:** Issuers may modify the terms to meet their borrowing needs and costs, and to attract various lenders with acceptable terms. ## Which of the following types of fixed-income securities is specifically aimed at short-term borrowing needs? - [x] Money market instruments - [ ] Mortgages - [ ] Long-term bonds - [ ] Preferred shares > **Explanation:** Money market instruments are fixed-income securities aimed at short-term borrowing needs. ## What is a unique feature of preferred shares in the context of fixed-income securities? - [ ] They usually come without any interest payments - [x] They have features of both equity and fixed-income securities - [ ] They are purely debt instruments - [ ] They are always convertible to common shares > **Explanation:** Preferred shares have features of both equity and fixed-income securities as they usually pay dividends but can also have fixed terms like debt securities. ## What is an example of a fixed-income security reflecting long-term borrowing needs? - [ ] Money market instruments - [ ] Commercial paper - [x] Long-term bonds - [ ] Bankers' acceptances > **Explanation:** Long-term bonds are examples of fixed-income securities reflecting long-term borrowing needs. ## Why do fixed-income securities attract a wide range of investors? - [ ] They promise high returns with high risk - [ ] They allow for easy conversion into commodities - [x] They offer predictable income and relatively lower risk - [ ] They guarantee capital appreciation > **Explanation:** Fixed-income securities attract a wide range of investors because they offer predictable income, relatively lower risk compared to equities, and a certain return if held to maturity.

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