Investment Basics

Fixed Income Investments
Fixed income investments (so called because the rate of interest is normally fixed at a certain level) involve you "loaning" your money to a government entity or a corporation for a specified time. In return, you receive interest. Depending on the issue, these interest payments may be made annually, semi-annually, monthly, or be allowed to compound until the date of maturity (at which time your original investment is returned with the interest that has accrued and compounded on the original investment).

Among the wide variety of fixed income investments are Treasury bills, Canadian and foreign bonds and debentures, strip bonds, NHA Mortgage-Backed Securities and GICs. Issuers include the federal and provincial governments, crown corporations, municipalities and public companies.

As a comprehensive introduction to the world of fixed income investing, BMO Nesbitt Burns offers The Bond Book. A copy is yours on request. Your BMO Nesbitt Burns Investment Advisor can provide additional background and assist you in assembling a fixed income portfolio designed to assist you in meeting your long- and short-term investment goals.

Bonds and Debentures
Normally issued to cover periods from one to 30 years, bonds and debentures provide dependably competitive interest income and a known maturity value. If your investment is held to maturity, periodic interest payments and repayment of invested capital are promised. However, your bond or debenture may also be sold prior to maturity in an attempt to take advantage of interest rate movements. As interest rates decrease, the value of bonds and debentures increases and vice versa.

Strip Bonds
Strip bonds are created by separating (or stripping) the principal amount of a bond or debenture from its coupon payments. Strip bonds are priced at a discount to their maturity value. As an investor, you are assured a known value at maturity and a competitive return. As a result, strip bonds are a popular choice for investors who do not require current income or who are saving for future goals. As with bonds and debentures, strip bonds may also be traded over the shorter term - in anticipation of interest-rate movements - in an effort to generate gains.

NHA Mortgaged-Back Securities
Essentially an interest in a pool of Canadian residential first mortgages, NHA Mortgage-Backed Securities offer federal government backing, monthly interest, a competitive rate of return and good liquidity. Sold in $5,000 denominations in terms of up to 10 years (and with the backing of Central Mortgage and Housing Corporation, an agency of the federal government) NHA Mortgage-Backed Securities are particularly well suited to investors seeking a regular income stream and who appreciate the fact that their investment is secured with real bricks and mortar.

Treasury Bills and Other Money Market Instruments
Canadian money market instruments appeal to investors looking for competitive returns for short periods of time. Issued for terms of one month to one year (and with a wide variety of maturity dates to match your needs) treasury bills, bankers' acceptances and commercial paper are attractive, higher-yielding alternatives to bank accounts and term deposits.

For more information, contact an Investment Advisor at a BMO Nesbitt Burns branch near you.

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Note: These comments are not intended to be a definitive analysis of tax law: The comments contained herein are general in nature and professional advice regarding an individual's particular tax position should be attained in respect of any person's specific circumstances.