Fixed Income
KNOWLEDGE EXPECTED OF: QAFP® Professionals
Highest Knowledge Level: Evaluation
Knowledge Levels and Associated Verbs
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Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
|
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
|
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
|
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
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Define
To state exactly the meaning of
|
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
|
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
|
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
|
Compare
To note the similarities and differences between two or more things
|
Estimate
To determine an approximate value for
|
Calculate
To find the value using mathematics
|
Convert
To change from one form or purpose to another
|
Evaluate
To reach a conclusion or make a through careful study
|
Interpret
To give the meaning of / to construe or understand / to translate orally
|
Hold cursor over or click on each term to read its definition.
- Identify the primary investment objectives typically associated with the asset class of fixed income.
- Income
- Preservation of capital
- Explain purposes for holding the asset class of fixed income, such as:
- Maintain / reduce volatility
- Generate income
- Identify investment vehicles that are a part of the asset class of fixed income, such as:
- Guaranteed Investment Certificates (greater than one year)
- Bonds and Debentures
- Federal bonds1
- Provincial/territorial/municipal bonds
- Corporate bonds
- International bonds
- Mortgage-backed securities
- Annuities
- Fixed income funds2
- Limited recourse capital notes (LRCN)
- Explain characteristics of each fixed income investment, such as:
- Relative potential for loss of capital
- Level of liquidity
- Relative level of volatility
- Expected rate of return
- Determine how each of these factors may impact the suitability of a fixed income investment:
- Time horizon
- Volatility
- Risk tolerance
- Investment objective
- Financial situation
- Personal situation
- Income
- Liquidity
- Control
- Tax impact
- Investment management process
- Economic cycle
- Cost
- Historical performance
- Performance expectations
- Evaluate how each of the factors may impact the suitability of a fixed income investment.
- Explain for whom each fixed income investment may be suitable.
- Explain how a return is generated for each fixed income investment.
- Interpret the return for a fixed income investment.
- Explain risks associated with each fixed income investment.
- Explain opportunities for diversification within the asset class of fixed income, such as:
- By the country in which the company operates (geographic diversification)
- By the industry in which the company operates (sector diversification)
- By the size of the company (market capitalization diversification)
- By the issuer of the debt (government versus corporate or different issuers within same industry)
- By the term to maturity of the debt (shorter versus longer time horizon)
- Identify that fixed income investments typically generate interest income.
- Explain the tax treatment (based on the asset location) of each type of fixed income investment.3
- When held to maturity4
- When disposed of prior to maturity
- Estimate the tax impact (based on the asset location) of each type of fixed income investment.5
- When held to maturity6
- When disposed of prior to maturity
- Identify that a process exists for disposing of a fixed income investment prior to maturity.
- Explain types of Guaranteed Investment Certificates, such as:
- Regular
- Variable rate
- Linked
- Rate-rising
- Foreign currency
- Explain interest options for Guaranteed Investment Certificates, such as:
- Monthly payments
- Annual payments
- Payout at maturity
- Simple interest
- Compound interest
- Identify that Guaranteed Investment Certificates may have redemption restrictions and/or costs associated with redemption prior to maturity.
- Explain the amounts that are taxed annually (based on asset location) for a Guaranteed Investment Certificate.
- Interest amount accrued or received by a non-linked Guaranteed Investment Certificate
- Minimum return guarantee for a linked Guaranteed Investment Certificate
- Explain the organizations that may guarantee the repayment of a Guaranteed Investment Certificate.
- The financial institution that issues the Guaranteed Investment Certificate
- The Canadian Deposit Insurance Corporation (CDIC), if specific criteria are met.
- Define the participation rate for a linked Guaranteed Investment Certificate.
- Explain that the main purpose of issuing a bond or debenture is to raise capital.
- Identify issuers of bonds or debentures, such as:
- The federal government
- Provincial/territorial/municipal governments
- Government agencies
- Public corporations
- International governments
- International corporations
- Identify that bonds are backed by physical assets owned by the issuer of the bond.
- Identify that debentures are backed by the credit of the issuer of the debenture.
- Explain rights of bondholders, such as:
- Right to receive interest payments as agreed
- Right to secure physical assets upon default of interest payments by the issuer of the bond
- Preferential right to assets upon dissolution of the issuer of the bond
- Explain types of bonds offered by the Government of Canada, such as:
- Government of Canada Bonds
- Real Return Bonds
- Explain that bonds offered by the provincial/territorial/municipal governments exist.
- Explain the components of a bond or debenture, such as:
- Face value / par value
- Price
- Term
- Maturity date
- Coupon
- Yield
- Define the values at which a bond or debenture may be priced.
- Premium
- Par
- Discount
- Define the term-to-maturity for a bond or debenture.
- Define the yield-to-maturity for a bond or debenture.
- Define the call-to-maturity for a bond or debenture.
- Explain features that may be available on a bond or debenture, such as:
- Strip
- Callable / Redeemable
- Extendible
- Retractable
- Convertible
- Purchase Fund
- Sinking Fund
- Explain how the features of a bond may affect the price of the bond.
- Define the classification of bonds based on risk.
- Investment grade
- Speculative
- Define an external bond.
- Identify that corporate bonds or debentures may have protective covenants to ensure that the bondholders’ security is not diluted or eliminated by the issuer of the bond.
- Determine how each of these factors may impact the value of the coupon rate for a bond or debenture:
- Risk of the issuer of the bond
- Type of security pledged for the bond
- Features of the bond
- Term of the bond
- Interest rates
- Explain the relationship between interest rates (bond yields) and the price of a bond.
- Explain the impact of the term-to-maturity on the volatility of the price of a bond.
- Explain the impact of the coupon rate on the volatility of the price of a bond.
- Explain the impact of yield changes on the volatility of the price of a bond.
- Explain bond duration.
- Interpret the duration of a bond or bond portfolio.
REFERENCES
1 Federal bonds include Treasury Bills, Government of Canada Bonds, Canada Savings Bonds, and Canada Premium Bonds & Canada Real Return Bonds. While they are debt securities that can provide a stream of income, Treasury Bills, Canada Savings and Canada Premium Bonds are denoted as cash and cash-equivalent investments given their ability to be liquidated at any time with no loss, and as their risk of default is the lowest available.
2 Investment structures with a focus on fixed income investment such as mutual funds, pooled funds, segregated funds, exchange-traded funds and similar investment structures are regularly included in the asset class of fixed income because of their underlying holdings.
3 The taxation of annuities is covered in the Annuities section of this topic.
4 Mortgage-backed securities may not have a maturity date.
5 The taxation of annuities is covered in the Annuities section of this topic.
6 Mortgage-backed securities may not have a maturity date.
KNOWLEDGE EXPECTED OF: CFP® Professionals
Highest Knowledge Level: Evaluation
Knowledge Levels and Associated Verbs
|
Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
|
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
|
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
|
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
|
||||||
|---|---|---|---|---|---|---|---|---|---|
|
Define
To state exactly the meaning of
|
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
|
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
|
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
|
Compare
To note the similarities and differences between two or more things
|
Estimate
To determine an approximate value for
|
Calculate
To find the value using mathematics
|
Convert
To change from one form or purpose to another
|
Evaluate
To reach a conclusion or make a through careful study
|
Interpret
To give the meaning of / to construe or understand / to translate orally
|
Hold cursor over or click on each term to read its definition.
- Identify the primary investment objectives typically associated with the asset class of fixed income.
- Income
- Preservation of capital
- Explain purposes for holding the asset class of fixed income, such as:
- Maintain / reduce volatility
- Generate income
- Identify investment vehicles that are a part of the asset class of fixed income, such as:
- Guaranteed Investment Certificates (greater than one year)
- Bonds and Debentures
- Federal bonds1
- Provincial/territorial/municipal bonds
- Corporate bonds
- International bonds
- Mortgage-backed securities
- Annuities
- Fixed income funds2
- Limited recourse capital notes (LRCN)
- Explain characteristics of each fixed income investment, such as:
- Relative potential for loss of capital
- Level of liquidity
- Relative level of volatility
- Expected rate of return
- Determine how each of these factors may impact the suitability of a fixed income investment:
- Time horizon
- Volatility
- Risk tolerance
- Investment objective
- Financial situation
- Personal situation
- Income
- Liquidity
- Control
- Tax impact
- Investment management process
- Economic cycle
- Cost
- Historical performance
- Performance expectations
- Evaluate how each of the factors may impact the suitability of a fixed income investment.
- Explain for whom each fixed income investment may be suitable.
- Explain how a return is generated for each fixed income investment.
- Interpret the return for a fixed income investment.
- Explain risks associated with each fixed income investment.
- Explain opportunities for diversification within the asset class of fixed income, such as:
- By the country in which the company operates (geographic diversification)
- By the industry in which the company operates (sector diversification)
- By the size of the company (market capitalization diversification)
- By the issuer of the debt (government versus corporate or different issuers within same industry)
- By the term to maturity of the debt (shorter versus longer time horizon)
- Identify that fixed income investments typically generate interest income.
- Explain the tax treatment (based on the asset location) of each type of fixed income investment.3
- When held to maturity4
- When disposed of prior to maturity
- Estimate the tax impact (based on the asset location) of each type of fixed income investment.5
- When held to maturity6
- When disposed of prior to maturity
- Identify that a process exists for disposing of a fixed income investment prior to maturity.
- Explain types of Guaranteed Investment Certificates, such as:
- Regular
- Variable rate
- Linked
- Rate-rising
- Foreign currency
- Explain interest options for Guaranteed Investment Certificates, such as:
- Monthly payments
- Annual payments
- Payout at maturity
- Simple interest
- Compound interest
- Identify that Guaranteed Investment Certificates may have redemption restrictions and/or costs associated with redemption prior to maturity.
- Explain the amounts that are taxed annually (based on asset location) for a Guaranteed Investment Certificate.
- Interest amount accrued or received by a non-linked Guaranteed Investment Certificate
- Minimum return guarantee for a linked Guaranteed Investment Certificate
- Explain the organizations that may guarantee the repayment of a Guaranteed Investment Certificate.
- The financial institution that issues the Guaranteed Investment Certificate
- The Canadian Deposit Insurance Corporation (CDIC), if specific criteria are met.
- Define the participation rate for a linked Guaranteed Investment Certificate.
- Explain that the main purpose of issuing a bond or debenture is to raise capital.
- Identify issuers of bonds or debentures, such as:
- The federal government
- Provincial/territorial/municipal governments
- Government agencies
- Public corporations
- International governments
- International corporations
- Identify that bonds are backed by physical assets owned by the issuer of the bond.
- Identify that debentures are backed by the credit of the issuer of the debenture.
- Explain rights of bondholders, such as:
- Right to receive interest payments as agreed
- Right to secure physical assets upon default of interest payments by the issuer of the bond
- Preferential right to assets upon dissolution of the issuer of the bond
- Explain types of bonds offered by the Government of Canada, such as:
- Government of Canada Bonds
- Real Return Bonds
- Explain that bonds offered by the provincial/territorial/municipal governments exist.
- Explain the components of a bond or debenture, such as:
- Face value / par value
- Price
- Term
- Maturity date
- Coupon
- Yield
- Define the values at which a bond or debenture may be priced.
- Premium
- Par
- Discount
- Define the term-to-maturity for a bond or debenture.
- Define the yield-to-maturity for a bond or debenture.
- Define the call-to-maturity for a bond or debenture.
- Explain features that may be available on a bond or debenture, such as:
- Strip
- Callable / Redeemable
- Extendible
- Retractable
- Convertible
- Purchase Fund
- Sinking Fund
- Explain how the features of a bond may affect the price of the bond.
- Define the classification of bonds based on risk.
- Investment grade
- Speculative
- Define an external bond.
- Identify that corporate bonds or debentures may have protective covenants to ensure that the bondholders’ security is not diluted or eliminated by the issuer of the bond.
- Determine how each of these factors may impact the value of the coupon rate for a bond or debenture:
- Risk of the issuer of the bond
- Type of security pledged for the bond
- Features of the bond
- Term of the bond
- Interest rates
- Explain the relationship between interest rates (bond yields) and the price of a bond.
- Explain the impact of the term-to-maturity on the volatility of the price of a bond.
- Explain the impact of the coupon rate on the volatility of the price of a bond.
- Explain the impact of yield changes on the volatility of the price of a bond.
- Explain bond duration.
- Interpret the duration of a bond or bond portfolio.
REFERENCES
1 Federal bonds include Treasury Bills, Government of Canada Bonds, Canada Savings Bonds, and Canada Premium Bonds & Canada Real Return Bonds. While they are debt securities that can provide a stream of income, Treasury Bills, Canada Savings and Canada Premium Bonds are denoted as cash and cash-equivalent investments given their ability to be liquidated at any time with no loss, and as their risk of default is the lowest available.
2 Investment structures with a focus on fixed income investments̶̶̶--such as mutual funds, pooled funds, segregated funds, exchange-traded funds and similar investment structures--are regularly included in the asset class of fixed income because of their underlying holdings.
3 The taxation of annuities is covered in the Annuities section of this topic.
4 Mortgage-backed securities may not have a maturity date.
5 The taxation of annuities is covered in the Annuities section of this topic.
6 Mortgage-backed securities may not have a maturity date.
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