Investors evaluating retirement income often consider more than the stated interest rate. Factors such as investment term, liquidity, payment structure, and minimum investment amount may also influence whether a fixed-income investment aligns with an investor’s financial objectives.
Fixed-income securities can vary widely in their terms and structure, depending on the issuer. Understanding these characteristics can help investors better understand how fixed-income securities are structured.
For purposes of this article, “flexibility” refers to differences in features such as maturity, interest-payment method, minimum purchase amount, transferability, and contractual redemption provisions. Some fixed-income products are issued with a single maturity and payment structure, while others may contain multiple elections or contractual redemption provisions. Investors evaluating these features can also review this guide to fixed-rate investments[1] for additional information about how common fixed-income investments differ.
Why Might Flexibility Matter to Some Retirees?
Retirement rarely follows a perfectly predictable path. Income needs, liquidity needs, and financial priorities can change over time, which is why some retirees look beyond the stated interest rate when evaluating the terms of a fixed-income investment.
An unexpected medical expense, a move closer to family, or the transition from part-time work to full retirement can change a household’s financial circumstances. Understanding an investment’s maturity, payment structure, and terms governing access to principal can help investors evaluate how those terms fit within their broader financial plans. Because these provisions vary among fixed-income investments, investors should review the applicable terms and risks carefully and consider their individual circumstances before making an investment decision.
How Fixed-Income Investment Terms Can Differ
One common example of a structured fixed-income product is a certificate of deposit (CD). According to Investopedia, a CD is a deposit account issued by a bank for a fixed period of time (typically ranging from three months to five years) in exchange for interest. The disclosure statement for a CD generally describes whether the interest rate is fixed or variable, when interest is paid, and other terms that apply to the account. Depending on the institution and the product, CDs may also include provisions governing early withdrawals, maturity, and automatic renewal. Investors should review the specific terms of any CD before purchasing.
Corporate debt securities can also have different structures and terms. Depending on the particular security, these may include provisions addressing maturity, interest payments, transferability, redemption, or circumstances in which an investor may request repayment before the scheduled maturity date. Phoenix Energy is an oil and gas company operating in the Williston Basin and an issuer of corporate debt securities. Separate information about Phoenix Energy’s bonds and notes[2] is available on the Phoenix Energy website.
Another common example of a fixed-income security is a bond. According to the U.S. Department of the Treasury, Treasury bonds (T-bonds) are long-term debt securities issued by the U.S. government with maturities of more than 10 years, up to 30 years. Treasury bonds generally pay a fixed rate of interest every six months until maturity, at which point the face value of the bond is repaid. The offering information for a Treasury bond describes its maturity date, interest rate, payment schedule, and other applicable terms. Investors should review the specific terms of any bond before purchasing.
While certificates of deposit, corporate notes, and Treasury bonds are all fixed-income investments, they may differ significantly in their maturity schedules, interest-payment structures, redemption provisions, and other contractual features. Understanding these differences is an important part of evaluating any fixed-income product. Before making an investment decision, investors should carefully review the applicable offering or disclosure documents to understand the specific terms, risks, and features of the security being considered.
How Corporate Notes and CDs Differ
Although certificates of deposit and corporate notes may share certain structural features, they are fundamentally different types of financial products. CDs issued by FDIC-insured banks are generally eligible for federal deposit insurance up to applicable limits and subject to FDIC rules. Corporate notes, by contrast, are securities and are not FDIC-insured. Repayment of a corporate note depends on the issuing company’s ability to meet its obligations.
The two products, CDs and corporate notes, may also differ in liquidity, maturity, transferability, redemption provisions, and other terms.
Understanding Terms and Interest-Payment Options
When comparing fixed-income investments, the stated annual interest rate is only one characteristic investors may consider. Other differences can include investment term, interest-payment method, liquidity, redemption provisions, and minimum purchase amounts.
Cash-interest and compound-interest structures can have different cash-flow and tax considerations. Those differences should be evaluated based on the investor’s individual circumstances, with input from financial and tax advisers as appropriate. It’s also important to distinguish a security’s maturity date from any contractual right to request redemption before maturity. Redemption rights may be subject to advance-notice requirements, timing restrictions, contractual limitations, legal restrictions, and the issuer’s available financial resources.
Minimum purchase amounts and issuer risk also matter. Because repayment depends on the issuer’s ability to meet its obligations, prospective investors should review the issuer’s financial condition, indebtedness, liquidity, and the risks described in the applicable offering documents.
No two fixed-income investments are identical. Differences in maturity, liquidity, redemption rights, payment structure, issuer credit worthiness, and other contractual terms may affect how an investment fits an investor’s objectives. Before investing, prospective investors should carefully review the applicable offering or disclosure documents and understand the specific terms and risks of the security being considered.
Disclaimer: Not an offer to sell, nor a solicitation of an offer to buy, any securities. Securities offered through Crescent Securities Group, Inc., member FINRA/SIPC, pursuant to a registration statement and prospectus or private placement memorandum, as applicable, and only where lawful. Investors must meet suitability requirements. For a complete discussion of risks, you should carefully review the registration statement and prospectus or private placement memorandum for the applicable offering prior to making any decision to invest. These documents may be obtained at phxoffering.com. An investment involves risk, including possible loss of principal and may be illiquid or unsecured. Past performance does not guarantee future results.
This material is provided solely for informational and educational purposes. It is not investment, legal, accounting, or tax advice, and should not be relied upon in making an investment decision.
[1] The linked guide discusses Phoenix Energy bonds and notes as examples of fixed-rate investments. Phoenix Energy’s bonds and notes are not FDIC-insured. Certain bonds and notes are unsecured, while certain notes are secured only on a junior basis, as described in the applicable offering documents. There is no established public trading market for these securities, and they may be illiquid. Investing involves risk, including possible loss of principal. See the applicable offering documents for complete terms and risks.
[2] Phoenix Energy’s bonds and notes are not FDIC-insured. Certain bonds and notes are unsecured, while certain notes are secured only on a junior basis, as described in the applicable offering documents. There is no established public trading market for these securities, and they may be illiquid. Investing involves risk, including possible loss of principal. See the applicable offering documents for complete terms and risks.
