knowledge topics
Fixed Income
KNOWLEDGE EXPECTED OF: Both CFP® Professionals and QAFPTM Professionals
- Identify the primary investment objectives typically associated with the asset class of fixed income.
- Income
- Preservation of nominal 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 bonds†
- Provincial/territorial/municipal bonds
- Corporate bonds
- International bonds
- Mortgage-backed securities
- Fixed income funds††
- 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
- Explain how each of the factors may impact the suitability of a fixed income investment, such as:
- 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.†††
- When held to maturity††††
- When disposed of prior to maturity
- Estimate the tax impact (based on the asset location) of each type of fixed income investment.†††
- When held to maturity††††
- 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 Certificates
- Minimum return guarantee for a linked Guaranteed Investment Certificates
- 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), given 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.
- Explain how each of the factors may impact the value of the coupon rate for a bond or debenture, such as:
- 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.
† 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 being cash and cash equivalent investments given their ability to be liquidated at any time with no loss, and their risk of default is the lowest available.
†† Investment structures with a focus on fixed income investments 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.
††† The taxation of annuities is covered in the Annuities section of this topic.
†††† Mortgage backed securities may not have a maturity date.
Glossary of Verbs (mouse over to see definition)
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Define
To state exactly the meaning of
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Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
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Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
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Compare
To note the similarities and differences between two or more things
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Estimate
To determine an approximate value for
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Calculate
To find the value using mathematics
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Convert
To change from one form or purpose to another
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Evaluate
To reach a conclusion or make a judgement through careful study
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Interpret
To give the meaning of / to construe or understand / to translate orally
Read more about the Taxonomy used in the FP-BoK
previous / Foundations of Asset Classes