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Comparison of Fixed Income Products

Product Type
Typical Investor Profile
Requirements and Restrictions
Tax Considerations
Maturity
Additional Details
Treasury Zero-Coupon Bonds/ STRIPS
Investors who:
Have specific maturity requirements
Are looking for growth
Are concerned about safety
STRIPS trade with a $5,000 minimum and increments of $1,000 thereafter.
There are no maximums.
The market for quantities under $5,000 is extremely limited.
Treasury zeros are considered original-issue discount debt obligations. The difference between the acquisition price and the maturity value is accreted over their life, and treated as interest for income-tax purposes.
Treasury zeros are exempt from most state and local taxes.
The client must pay tax yearly on "phantom" income for zeros held outside of a tax-sheltered account.
If zeros are sold prior to maturity, any profits are taxed as capital gains.
Available out to 30 years.
Backed by the full faith and credit of the U.S. government.
A range of maturities are available to fit clients’ needs.
Liquidity is provided by an active secondary market.
Prices are discounted, so clients need less up-front money to purchase zeros.
Treasury Securities
(T-bills, T-bonds, T-notes)
Investors seeking highest degree of safety, backed by full faith and credit of U.S. Government.
Minimum order size at auction for non-competitive bids is $1,000 and increments of $1,000 thereafter.
Maximum order size for non-competitive bids is $5 million.
There is no maximum order size for orders placed in the secondary market.
Although Treasuries are subject to federal tax, they are exempt from state and local taxes.
See the table below for a comparison of T-bills, T-bonds and T-notes.
U.S. government guarantee of timely payment of principal and interest
A variety of maturities available
An active secondary market
Safety of principal
Liquidity
Relief from state and local taxes
Reliable current income
Marginable, which increases buying power
Treasury Inflation-Protected Securities (TIPS)
Investors seeking to hedge against inflation.
 
The minimum purchase is $1,000, with increments of $1,000 thereafter.
At auction, the maximum order is $5,000,000 face amount.
In the secondary market, there are no maximums.
TIPS are subject to federal income tax, as well as the federal alternative-minimum tax (AMT).
They are exempt from state and local taxes.
TIPS are generally most suitable for tax-deferred accounts, because the inflation adjustments are taxed in the year that the adjustments occur.
Investors who hold TIPS in taxable accounts may have to pay tax on this “phantom” income.
TIPS are available at auction with maturities of five, 10 and 20 years.
The principal amount increases along with the rate of inflation—or decreases with the rate of deflation—as measured by the Consumer Price Index for all Urban Consumers (CPI-U).
At maturity, the investor is paid either the inflation-adjusted principal or the original principal, whichever is greater.
TIPS are available at auction with maturities of five, 10 and 20 years.
They are typically purchased by investors seeking a hedge against inflation.
Agency Securities
Investors seeking relatively high yields with a high degree of safety.
Minimum order size varies with the agency and type of security.
In the over-the-counter market, discount notes generally trade with a $100,000 minimum, and debentures with a $10,000 minimum.
FFCB and FHLB issues are exempt from state and local taxes.
FNMA and FHLMC issues are fully taxable.
Agency Debentures
Maturities of one to 30 years.
Agency Discount Notes
Maturities of up to 365 days.
Agency Step-Ups
Maturity range of three to 15 years.
Agency securities are backed bya federal agency.
Agency securities typically have higher yields than Treasury issues.
Agency Zero-Coupon Bonds
Investors who:
Have specific maturity requirements.
Are looking for growth.
Are concerned about safety.
 $10,000 minimum investment, with $1,000 increments thereafter.
No maximums, subject to availability.
 
Exempt from state and local taxes.
Maturities for FICO and REFCO bonds were originally issued out to 30-40 years.
Backed by  a federal agency.
Typically offer higher yields than Treasury issues.
Ginnie Mae Securities
Investors seeking:
Monthly income.
A measure of safety.
Relatively higher yields than other government investments.
Ginnie Maes trade in minimum lots of $25,000 face value, with increments of $5,000 thereafter.
There are no maximums, subject to availability.
Interest payments are taxable at the federal, state and local levels.
A typical mortgage is amortized over either 15 or 30 years, and GNMA pass-throughs are therefore issued with maturities of 15 or 30 years.
The average life of a GNMA security will vary based on the average number of years it takes for a mortgage in the pool to be repaid.
Yields are quoted to the average life (not as yield to maturity).
As homeowners make their mortgage payments to the bank or savings-and-loan institution that originated the mortgage, the bank forwards the mortgage payments to Ginnie Mae owners.
The bank deducts a service charge (usually 0.5%).
GNMAs trade with accrued interest, due to payment delays. (For example, February interest pays on March 15th).
Interest payments are taxable at the federal, state and local levels.
Collateralized Mortgage Obligations (CMOs)
 
Most CMOs have a minimum order size of $10,000 face value, with increments of $1,000 thereafter. Some issues may have a higher minimum amount.
All CMOs are fully taxable.
Some issues may be subject to original-issue discount.
Though the underlying mortgages have 15- or 30-year stated maturities, the average life of any class may be shorter.
The issuer can make partial principal payments throughout the life of the security on a monthly, quarterly or semiannual basis. This means that a CMO’s actual maturity can differ significantly from its stated “face” maturity.
The underlying mortgages used for collateral are Ginnie Mae (GNMA), Fannie Mae (FNMA), or Freddie Mac (FHLMC) mortgages, or whole-loan mortgages (usually non-conforming mortgages with credit enhancements).
A drop in interest rates generally leads to a subsequent increase in mortgage prepayments, shortening a CMO’s average life. A corresponding increase in rates generally results in lengthening the average life.
Corporate Bonds/Retail Notes/Medium-Term Notes
Investors who seek:
Generally fixed rates of return, provided the bonds are held to maturity.
Higher yields than Treasury bonds (although with greater risks).
Capital appreciation with less risk than common stock.
Corporate bonds generally trade in minimum lots of $1,000, with increments of $1,000 thereafter.
There are no maximums, subject to availability.
Interest is fully taxable at the federal, state and local level. It is calculated on a 30-day/month and 360-day/year basis.
Short-term bonds, with maturities of one to five years, are generally issued by financial institutions.
Issuers of intermediate-term bonds, with maturities of five to 10 years, include banks.
Issuers of long-term bonds, with maturities of 10 to 30 years, include utilities and industrial companies.
Corporate bonds typically have a term maturity, which means that all of the principal is scheduled to be repaid  at maturity.
 
Par value typically is $1,000, although some bonds may be issued with a par amount as high as $50,000.
Preferreds (Hybrid, Convertible)
Investors seeking dividends at a fixed rate, or seeking relatively high yields in a tax-deferred retirement account.
Preferred stock does not generally carry voting rights.
Preferred stockholders continue to earn the same fixed dividend, even if the common-stock dividend is raised.
Preferred-stock dividends are fully taxable at the federal, state and local levels.
To avoid taxes on "phantom” income (which has accrued but has not yet been received), investors often hold preferreds in tax-deferred retirement accounts.
QDI eligible issues available 
Maturities range from stated maturity with call features to perpetual maturities with call features.
Preferreds offer liquidity, because they trade on major exchanges.
Investors enjoy attractive yields, along with investment-grade credit ratings.
Hybrid preferreds offer the possibility of enhanced returns, without sacrificing credit quality.
Par value is usually $25, and the distributions are cumulative.
Typically, distributions can be deferred for up to 20 quarters while continuing to accrue interest. Deferred distributions are fully taxable to the owner.
Commercial Paper
Investors seeking relatively high short-term yields.
Because commercial paper is intended to be held to maturity, the secondary market is limited.
Early withdrawals are permitted only on an exception basis.
Commercial-paper trades require cash in the account.
Interest is fully taxable in the year of maturity. There is no phantom interest.
Maturities ranging from one to 270 days.
Rates are locked in, if the paper is held to maturity.
Paper is quoted on a bond-equivalent yield basis, and priced at a discount to maturity.
Yields are calculated on a 365-day/year basis.
Certificates of Deposit (CDs)
Investors seeking:
A conservative investment with a fixed rate of return for a fixed amount of time.
Generally considered a safe place to invest funds.
The ability to lock in prevailing rates.
For all accounts, the minimum purchase amount is $2,000 face amount.
The maximum purchase amount is $95,000 per account designation. This policy helps to insure that the client’s entire principal and interest is covered under the $100,000 FDIC insurance limit.
If a client’s holdings exceed $100,000, either because he or she has deposits with the same institution in the same name outside of Schwab or because there is accrued interest on the CDs, the excess amount is not covered by FDIC insurance.
CDs are fully taxable at the federal, state and local levels.
Wide choice of maturities, from three months to 15 years or more.
CD Interest may be paid monthly, quarterly, semiannually, annually or at maturity, and is calculated on a 365-day basis.
The rate quoted on CDs is the interest rate, not the annual-percentage rate.
Interest is not reinvested; it is credited to a Schwab account.
The proceeds may earn interest if the Schwab account has a money market or Schwab One® feature.
Zero-coupon CDs are issued at a discount, pay no interim interest and return par value at maturity.
Equity-linked CDs
Investors who:
Want some exposure to broad-based equity indices.
Are not willing to accept a loss of principal.
Are willing to take the risk that principal may be returned without any earned interest.
Have an intermediate-term time horizon of 3 -7 years.
Want convenience with safety.
The minimum investment is $10,000, with increments of $1,000 thereafter.
There is no secondary market for ECDS.
ECDs are generally subject to "phantom” tax on interest that has been accrued but not yet distributed. To avoid this, ECDs are often held in tax-advantaged accounts, such as retirement accounts.
Maturities range from 1-15 years.
ECDs are insured by the FDIC for up to $100,000 per account holder.
Principal is 100% protected (when held to maturity).
Typically, ECDs do not pay any interest during the term. Investors realize all gains, if any, at maturity.
Most ECDs have stated redemption dates.
The redemption price usually is dictated by the current market value of the investment.
Municipal Bonds
Investors in higher tax brackets, who are seeking tax benefits, a fixed stream of income and preservation of capital.
Typically, the minimum investment is $5,000, with increments of $5,000 thereafter.
Maximums are limited only by the availability of bonds.
The interest income received from most municipals is exempt from federal income taxes; in most cases, it is also exempt from state and local income taxes within the state that sponsored the issue.
Some municipal bonds may be subject to the alternative-minimum tax (AMT), if they are for “non-essential” uses such as stadiums, airports and pollution-control facilities.
The client may incur a tax obligation at maturity or at sale on any gain in principal, whether that comes from the amortization of a discount on the bond or a capital gain from an increase in market price.
Maturities typically range from one month to 30 years in both primary and secondary markets.
Municipal bonds generally are used to raise money for public purposes, such as sewer and water systems, schools, highways and hospitals.
Municipals are rated by various rating agencies. Any security rated lower than Baa by Moody’s or BBB by Standard & Poor's is considered to be of speculative quality.
Interest is computed on a 360-day/annual basis, and is generally paid semi-annually.
Municipal bond yields may be higher than the after-tax yields of Treasuries and corporates of similar quality, particularly for clients in higher tax brackets.
UITs
Typical investors are:
Clients who want steady income
Clients who want to know in advance exactly which type of securities will be held in the trust, and what yields to expect
Conservative investors looking for preservation of principal and current income
Clients who want tax-exempt income
Clients looking for professional selection of a diversified portfolio of securities
There is generally a sales charge or load relating to investing in a UIT. The price the investor pays is the net-asset value (NAV) of the trust, plus the sales charge or load.
UITs at Schwab have a minimum order size of $1,000.
Interest from tax-exempt (municipal-backed) trusts are usually exempt from federal taxes, and may be exempt from state taxes for local residents
Maturities range from one to 30 years. They are determined by the type of security in the trust portfolio, and whether the UIT is being bought in the primary or secondary market.
Interest payments vary, according to the terms of each trust.
As bonds are called or mature within the trust, principal is returned to the shareholders of the trust.
Each UIT is scheduled to terminate on a date specified in the trust document.
Some UITs allow investors to “roll” into a new trust series at a reduced sales load when the previous series has terminated.
UITs provide a steady flow of income, including the return of principal.
International Bonds
Investors who are primarily invested in domestic securities and would like to diversify.
 
Schwab Institutional requires all investments to be held in U.S. dollars.
In order to trade international bonds, the position must be “converted” into U.S. dollars during the transaction.
This means that a currency transaction must occur in conjunction with the buying or selling of a foreign-bond position.
The minimum order for foreign bonds and Euro bonds is $250,000, with increments of $5,000 thereafter.
The minimum order for Brady bonds is $250,000, with increments of $250,000 thereafter.
All purchases are subject to availability.
Taxation of international bonds varies, based on international tax treaties.
Maturity typically range out to 30 years, however, longer maturities are available.
Interest on international bonds may be paid semiannually or annually.
Investors in foreign securities are subject to many of the same risks that affect domestic securities (such as interest-rate risk and market volatility).
Investors in foreign securities may also be exposed to additional risks, such as:
Political and economic instability.
Differing financial-accounting standards.
Currency fluctuation.
Lack of liquidity.

 

Comparison of Treasury Securities

Type

Term and Maturity

Issued

Interest

Quoted

Treasury Bills
(T-bills – also referred to as discount securities)

Short-term
Maturities of one year or less

Issued at a discount to face value

Difference between discount and face value is interest received at maturity
Calculated on a 360-day year

On discount-rate basis
Bond equivalent yield also may be quoted

Treasury notes
(T-notes)

Intermediate-term
Maturities range from two to 10 years

Generally issued around par

Paid every six months
Calculated on a 365-day year
Taxed in year received

As a percentage of face value, with changes typically expressed in 1/32 of a point

Treasury bonds
(T-bonds)

Long-term
Maturities range from 11 to 30 years

Generally issued around par

Paid every six months
Calculated on a 365-day year
Taxed in year received

As a percentage of face value, with changes typically expressed in 1/32 of a point

Comparison of Agency Issues

Type

Minimum Order Size*

Maximum Order Size

Interest

Federal National Mortgage Association

$10,000, with increments of $5,000 thereafter for both debentures and discount notes.

None.

Paid semiannually on debentures.
Discount notes pay interest at maturity.

Federal Home Loan Mortgage Corporation

$10,000 for debentures and $25,000 for discount notes, with increments of $5,000 thereafter on both.

None.

Paid semiannually on debentures.
Discount notes pay interest at maturity.

Federal Home Loan Bank

$10,000 for debentures and $100,000 for discount notes, with increments of $5,000 thereafter on both.

None.

Paid semiannually on debentures.
Discount notes pay interest at maturity.

Federal Farm Credit Bank

$50,000 for debentures and $100,000 for discount notes and medium-term notes, with increments of $5,000 thereafter for all.

None.

Paid semiannually on debentures and medium-term notes.
Discount notes pay interest at maturity.

Student Loan Marketing Association

$10,000 for debentures and floating-rate notes and $100,000 for discount notes, with increments of $5,000 thereafter for all.

None.

Paid semiannually on debentures and quarterly on floating-rate notes.
Discount notes pay interest at maturity.

* Note: Although the order sizes above are typical, each agency issue has its own specific minimum-order requirements and denominations. In the over-the-counter market, discount notes generally trade with a $100,000 minimum, and debentures with a $10,000 minimum.

 

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