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Fixed Income

Fixed income securities pay a specific interest rate, such as bonds, money market instruments and preferred stock and are attractive to investors who rely on their investments to provide a regular, stable income stream and reliable returns.

For a well diversified portfolio, Regal offers access to a variety of fixed income products including a full service bond desk to assist in building your fixed income portfolio. Contact your financial representative for information.

Preferred Stock: Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders do not have voting rights as common stockholders do. Unlike common stock, a preferred stock pays a fixed dividend, holders always receive their dividends first, and the dividend does not fluctuate. However, the company does not have to pay the dividend if it lacks the financial ability to do so. The main benefit to owning preferred stock is that the investor has a greater claim on the company’s assets than common stockholders and takes precedence over common stock in the event of liquidation. The precise details as to the structure of preferred stock are specific to each corporation.
Unit Investment Trusts (UIT's): A UIT is an SEC-registered investment company which purchases a fixed, unmanaged portfolio of income-producing securities and then sells shares in the trust to investors. The investment is a fixed portfolio of securities with a one-year life (or other set term).

The major difference between a Unit Investment Trust and a mutual fund is that a mutual fund is actively managed, while a unit investment trust is not managed at all. Capital gains, interest and dividend payments from the trust are passed on to shareholders at regular periods. If the trust is one that invests only in tax-free securities, then the income from the trust is also tax-free. A unit investment trust is generally considered a low-risk, low-return investment. Some investors prefer UIT's to mutual funds because UIT's typically incur lower annual operating expenses (since they are not buying and selling shares); however, UIT's often have sales charges and entrance/exit fees. Each unit typically costs $1,000.

Investing in UIT's is a long-term strategy and therefore, investors should consider their ability to pursue investing in successive trusts; and discuss the tax consequences associated with rolling over an investment from one trust to the next with a tax adviser.

Certificates of Deposit (CDs): A certificate of deposit is a promissory note issued by a bank or savings and loan entitling the bearer to receive interest. It is a time deposit that restricts holders from withdrawing funds on demand and money removed before maturity is subject to a penalty. A CD bears a maturity date, a specified fixed interest rate, can be issued in any denomination and with terms ranging from short to medium term. CDs are insured by the FDIC up to $100,000.

FDIC-insured debt instrument offered by banks CDs offer higher rates of return than most comparable investments, in exchange for tying up invested money for the duration of the certificate's maturity. CDs are low risk, low return investments, and are also known as "time deposits", because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years.

Selling CDs Before Maturity – CDs sold prior to maturity are subject to a concession and may be subject to a substantial gain or loss due to interest rate changes. CDs available in the secondary market may not be FDIC insured.

CDs issued by FDIC–insured institutions and held in eOption accounts are generally insured up to the following limits:

Up to $250,000 per account owner per institution for depository assets held in non-retirement accounts. On October 3, 2008, certain FDIC insurance coverage limits were temporarily increased from $100,000 to $250,000. These temporary increases will remain in effect until December 31, 2009. Additional information can be found on the FDIC website. CDs which mature after 12/31/2009 will have the $250,000 coverage up to the 12/31/2009 date. After that the insurance will revert to the $100,000 level.
Effective 4/1/2006, up to $250,000 per account owner per institution for depository assets held in qualifying retirement accounts such as traditional or Roth IRAs.

All of the new issue Brokered CDs eOption offers are FDIC insured. For more information regarding FDIC coverage, please consult www.fdic.gov.

CD Coverage Limits – FDIC insurance limits apply to aggregate amounts on deposit at each covered institution. Investors should consider the extent to which other accounts, deposits or accrued interest may exceed applicable FDIC limits.

Before you consider purchasing a CD from your bank or brokerage firm, Investors should fully understand all of its terms and carefully read all disclosure statements. For more information about federal deposit insurance, read the FDIC's publication Your Insured Deposits or call the FDIC's Central Call Center at (877) 275-3342.

Municipal Bonds: Municipal bonds are debt securities issued by a state, municipality, county and various other public entities to finance capital improvements or to refinance existing debt at a lower cost. Municipal bonds and bond funds are generally bought for their favorable tax implications and are a popular fixed-income investment. They are exempt from federal tax, and are generally exempt from state taxes for residents of the state in which they are issued. The primary investors in municipal bonds include individuals, mutual funds and financial institutions, including commercial banks and casualty insurance companies. Like all bonds, the municipal variety is subject to an investor's consideration of yield, credit quality and duration.
Corporate Bonds: Corporate bonds are debt obligations, or IOUs, issued by private and public corporations. While a corporate bond gives you an IOU from the company, you do not have an ownership interest in the issuing corporation—unlike when you purchase the company's stock. Companies use the funds they raise from selling bonds for a variety of purposes, from building facilities to purchasing equipment to expanding the business.

Corporate bonds often pay higher rates than government or municipal bonds, because of the higher degree of risk. They are typically issued in multiples of $1,000 and/or $5,000, are taxable, have a term maturity and are traded on a major exchange. Until the maturity date, the corporation usually pays a stated rate of interest, generally semiannually. Bonds can mature anywhere between 1 to 30 years.

Changes in interest rates are usually reflected in bond prices. Bonds are considered to be less risky than stocks, since the company has to pay off all its debts (including bonds) before it handles its obligations to stockholders. Corporate bonds have a wide range of ratings and yields because the financial health of the issuers can vary widely.
US Government Agency Securities: A security, usually a bond, issued by a U.S. government-sponsored agency. These offerings are sponsored by the government, but because the agencies are private entities they are not guaranteed by the government. These agencies have been set up in order to allow certain groups of people such as students and home buyers to access low cost financing. Some prominent issuers of agency securities are Student Loan Marketing Association (Sallie Mae), Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). Agency securities are usually exempt from state and local taxes, but not federal tax.
US Government Treasury Securities: These negotiable debt obligations are backed by the “full faith and credit” of the U.S. Government and are exempt from state and local taxes, but not from federal. U.S. Treasury Securities are issued by the U.S. government in order to pay for government projects. The money paid out for a Treasury bond is considered a loan to the government. As with any loan, repayment of principal is accompanied by a specified interest rate.

Prices on the secondary market and at auction are determined by interest rates. U.S. Treasury Securities issued today are not callable, and continue to accrue interest until the maturity date.

Because there is almost no risk of default by the government, the return on Treasury bonds is relatively low, and a high inflation rate can erase most of the gains by reducing the value of the principal and interest payments.

One possible downside to U.S. Treasury Securities is that if interest rates increase during the term of the bond, the money invested will be earning less interest than it could earn elsewhere. Accordingly, the resale value of the bond will decrease as well.
Zero Coupon Bonds: Zero coupon bonds are bonds that do not pay interest during the life of the bond with maturity dates usually being long term. Investors buy zero coupon bonds at a deep discount from their face value. At maturity, the investor will receive one lump sum equal to the initial investment plus interest that has accrued. The long-term maturity dates allow for planning of long range goals and with the deep discount, an investor can put up a small amount of money that can grow over many years.

Although zero coupon bonds do not pay any interest until they mature, investors may still have to pay federal, state, and local income tax on the imputed or "phantom" interest that accrues each year. Some investors avoid paying the imputed tax by buying municipal zero coupon bonds (if they live in the state where the bond was issued) or purchasing the few corporate zero coupon bonds that have tax-exempt status.
Reverse Convertibles: Reverse Convertible bonds can be converted to cash, debt or equity at the discretion of the issuer at a set date. These types of bonds usually have shorter terms to maturity and higher yields than most other bonds because of the risk involved for investors, who may be forced to redeem their bonds for securities in a company that have, or are expected to, decrease substantially in value. The difference between a regular convertible bond and a reverse convertible bond is the options attached to the bond. While a convertible bond gives the bondholder the right to convert the asset to equity, a reverse convertible bond gives the issuer the right to convert to equity. Reverse convertible bonds are a similar vehicle to convertible bonds as both contain embedded derivatives. In the case of reverse convertible bonds, the embedded option is a put option that is held by the bond's issuer on a company's shares. These investments give the issuer the right, but not the obligation, to convert the bond's principal into shares of equity at a set date. This option is exercised if the shares underlying the option have fallen below a set price, in which case the bondholders will receive the equity rather than the principal and any additional coupons. The yield on this type of bond is higher than a similar bond without the reverse option.

Clients should take special care in understanding all of the risks involved prior to investing in Fixed Income products as they are not suitable for all investors. Unless stated otherwise, many fixed income products may be called prior to maturity which may reduce the expected yield if purchased at a premium. Individual securities may be subject to other call features or corporate restrictions that may have effects that are similar to that of a call. In addition, proceeds from the sale of fixed income securities that are sold prior to maturity may be worth more or less than had originally been invested due to price fluctuations, changes in interest rates, market conditions or changes in the credit quality of the issuer of the instrument.

Regal Securities makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.

Fixed Income

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