Fixed Income FAQs

Benefits of fixed income investing include:

• Diversification: Adding bonds to a stock portfolio can help lower portfolio volatility over time.
• Capital preservation: Bonds typically have a stated maturity date, when the principal is expected to be repaid. As a result, bonds are designed to protect principal, which can be useful when trying to save for future expenses such as buying a home or paying for college.
• Income: Fixed income securities are typically designed to generate a consistent stream of income, often to help supplement an existing income or create one in retirement.

Interest, credit, inflation and call risk:

• Interest rate risk - When interest rates fall, bond prices rise. When interest rates rise, bond prices fall. You risk losing principal if you need money from a bond before it matures and you have to sell it when the price is low.
• Credit risk - You risk that a bond’s issuer will be unable to make interest payments or return your principal at maturity as promised.
• Inflation risk - Inflation can cause risk for bonds and investments that pay a fixed amount of income. If prices rise due to inflation, but the interest payments you receive don’t change, you lose purchasing power.
• Call risk - Some bonds are sold with a call provision that gives the issuer the right to redeem (call) the bond and return the principal before it matures. Bonds are more likely to be called when interest rates fall and the issuer can issue new bonds with a lower interest rate.

Whether you plan to build your own fixed income portfolio or have it professionally constructed, understanding the steps involved can help you feel more informed moving forward.

1. Define a goal: Start by clarifying your reasons for adding fixed income to your portfolio: Is it to help preserve capital, diversify your portfolio, or generate income?
2. Choose an allocation: By combining bond investments with varying maturities and credit ratings, you can create fixed income portfolios that align with various levels of risk and are designed to meet different financial goals.
3. Select ways to invest: Once you’ve defined your allocation, consider the ways in which you might invest. There are a variety of ways to invest in fixed income (e.g., individual bonds and CDs, bond mutual funds and ETFs, or managed accounts).

Schwab provides: 

• Guidance and support from an experienced team of Schwab Fixed Income Specialists who work directly with our trading desk to offer personalized assistance with pricing, answer bond investing questions, and use specialized criteria to contact other firms to seek better prices on large block trades or securities. 
• A wide selection of bonds, bond funds and ETFs, CDs, preferred securities, and managed accounts to choose from. 
• Low, straightforward pricing, so you keep more of your money.

When you invest in a bond, you are a company's lender and the bond is like an IOU - a promise to pay back the money you've loaned, with interest. Cities, states, the federal government, government agencies and corporations issue bonds to raise money for purposes such as building roads and improving schools or technology.

Bonds can be purchased in the primary market where newly issued securities are sold (through underwriters or individual dealers) to investors by the issuer (i.e., the federal government, a municipality, a government agency or a corporation). When you buy a new issue in the primary market, you pay the new issue offering price, which is the same for all buyers.

Bonds can also be purchased in the secondary market, in which previously issued bonds are traded between dealers and investors, including institutions. Security prices are allowed to float at prices set by the market.

If you are considering buying a bond, you can search primary and secondary market offers for a bond.

When you buy a bond, the quoted yield considers the bond's annual interest rate and any difference between the purchase price and the amount you're expected to receive upon maturity or issuer call (the par or face value).

Interest payments generally account for the bulk of a bond's return and are based on the bond's coupon (interest received on a bond) which is usually fixed for the life of the bond (although, some bonds have variable rates). The amount a bond pays is largely determined by the prevailing interest rate and factors specific to that bond.

A bond's yield is a measure of expected return based on its coupon, price and other factors.

The coupon is the annual interest rate the issuer promises to pay the holder each year, usually expressed as a percentage of par value (the amount the issuer originally borrowed and is obligated to pay back when the bond matures) of the security.

The yield reflects the approximate measure of returns to the investor.

When a bond's price moves up or down, it still pays the same interest to the holder. Annual interest payments are calculated by multiplying the bond's face value by the coupon rate. Payments are generally made in semiannual installments, based on the dates set in the initial POS (Preliminary Offering Statement). You can find details for frequency and date of payment by clicking the description of the bond.

The interest that has accumulated since the last interest payment date. The seller of a bond is entitled to accrued interest, which is paid by the buyer and added to the price of a bond transaction. Accrued interest is calculated up to (but not including) the settlement date.

Credit rating: A bond's interest rate reflects the issuer's credit risk (often issued by a credit rating agency re: the issuer's ability to make payments) relative to other bonds. Generally, the lower the credit rating, the higher the interest rate, because investors expect extra compensation for greater risk. 

Maturity: Generally, the longer the maturity, the higher the interest rate. Investors expect to earn more on longer-term investments because their money is committed for a longer period of time and unavailable for new investments.

The annual rate of return assuming a bond is held to maturity and all of the interest payments are reinvested at the original rate - Also known as the internal rate of return (IRR) for the bond.

Bonds are generally issued with a $1,000 par value. When a bond's price rises above the $1,000 par, it's trading at a premium. When the price falls below the $1,000 par, it's trading at a discount.

The bond is trading at a premium, a price above par (100), because the yield to maturity on the bond is below the listed coupon on the bond. Changing interest rates cause bond prices to rise and fall. For example, when rates rise, newly issued bonds must pay a higher interest rate to attract investment. This causes existing bonds with lower rates to fall in value because their payment rate is less attractive.

The lowest potential rate of return for a bond, the lower of Yield to Call or Yield to Maturity.

An assessment of an issuer's ability to repay its debt, based on its history of borrowing, repayment, and other factors. Credit ratings are generally provided by an independent agency such as Standard & Poor's or Moody’s Investors Service and are available through Schwab BondSource^® on the Search Results and Order Verification pages. Ratings reflect a current assessment of the issuer's creditworthiness and do not guarantee future performance.

Schwab provides the ability to sell most fixed income securities via Schwab.com if there are sufficient existing market bids available. If current bids cannot be found, or do not meet the quantity for which you want to trade, you may also request that Schwab look for bids to sell your bonds or CDs. Schwab.com allows you to: 

• See all existing bid (and ask) prices for a bond on the Market Depth tab 
• Sell your bonds on Schwab.com 
• Request that Schwab look for more bids if there are insufficient bids for your position
• Receive an email alert when your bid is ready

Please review the Selling Bonds Online User Guide within Schwab.com (login required) to better understand various ways to sell online.

No, the price shown online via positions, or on your statement, may differ from actual market transactions and should be used for approximate account valuation purposes only.

An estimated price for an individual fixed income investment, usually based on a pricing model that considers trades for similar securities, benchmark prices, dealer quotations and other factors. Clients cannot transact at the matrix price shown. If they would like to buy or sell, they would need to get an offer or bid on the bond.

No, Schwab does not currently allow clients to place limit orders on individual bond securities.

Bond laddering is a strategy that can help minimize exposure to interest rate fluctuations. Instead of buying bonds that are scheduled to come due during the same year, you purchase bonds that mature at staggered future dates.

A barbell strategy divides the allocation of bonds between short and intermediate term maturities in an attempt to maximize the benefits of each. The short-term bonds provide liquidity that can be quickly reinvested in new bonds when rates rise, while the longer-term maturities provide income.

For investors sidelined with a high proportion of cash, waiting for interest rates to rise, a barbell strategy may be a good way to work into a bond ladder over time. As rates gradually rise, investors could add some intermediate-to-long-term bonds to the portfolio.

A bullet strategy purchases several bonds that mature at the same time. By targeting this specific maturity, the investor aims to invest in a particular segment of the yield curve – thus, the term “bullet.” Though the bonds mature at the same time, they are all purchased at different times.

Fixed Income Pricing

See Clear Pricing, Low Costs

Schwab offers brokered CDs which can be resold through brokerage firms at the market price. If the client wants to redeem before the maturity, the price may differ from the original purchase price of CD, which may result in a gain or loss. Banks offer traditional CDs and often have you forfeit the interest payment to redeem CD early.

Quotes and order placement are available 22 hours/day, 7 days/week (not available 2:00 a.m. – 4:00 a.m. EST). Orders placed outside market hours will be executed the next market day, if the offering is still available.

Minimum investment: To purchase a CD in your Schwab brokerage account through Schwab CD OneSource, the minimum amount needed is $1,000. You can increase your CD investment in $1,000 increments. Before placing your order, you’ll need to have the full purchase price in the form of cash on deposit in your Schwab brokerage account.

Like bank CDs, CDs purchased in your brokerage account through Schwab CD OneSource earn a fixed rate of interest (if held to maturity) over a set period of time and are from FDIC-insured banks. Plus, CDs can now be purchased at your convenience, 22 hours/day, 7 days/week. Other benefits include:

Competitive rates: Schwab CD OneSource offers you a virtual one-stop marketplace for CDs, with competitive rates, in one convenient location. Use Schwab CD OneSource to compare CDs by yield, maturity, and institution. There is no additional charge when you buy a new issue CD through Schwab CD OneSource as the deposit institution itself pays Charles Schwab & Co., Inc. a fee for distributing its CDs. Secondary market CDs do have a fee associated to trading; Please see pricing above for details.

FDIC-insured for $250,000: CDs purchased through Schwab CD OneSource carry the same amount of FDIC insurance per bank. Schwab offers multiple banks to achieve greater FDIC coverage.

Choice and control: Schwab CD OneSource offers a selection of CDs screened from hundreds of institutions throughout the U.S., making it easy to search for the rate and maturity that meet your needs. Additionally, your CDs are held in your Schwab brokerage account, not at the issuing institution, allowing you to see your whole financial picture and manage your investments in one place.

Notification of maturity: Schwab will send you a reminder when your CD reaches maturity, asking how you would like us to handle your CD funds. If you want to roll over the CD, perhaps choosing a different institution with a different interest rate, simply call us or go to Schwab.com to see current availability.

We'll help you sell the CD at the current market price or you may choose to request a bid online. If you decide to sell, you'll receive the bid price plus accrued interest. The price may differ from the original purchase price of CD, which may result in a gain or loss.

All CDs in Schwab CD OneSource are offered by FDIC-insured banks. The amount insured by the FDIC is $250,000 per depositor per insured bank. Each CD you purchase from a different institution is FDIC-insured in aggregate based on ownership type at that bank. For example, if you own two CDs, one purchased for $250,000 from one bank and the other for $250,000 from a second bank, and you have no other deposits at those banks, you’re covered for $500,000. FDIC coverage limits are dependent on type of account you hold. Please visit https://www.fdic.gov/ for details specific about your coverage limits.

Clients see a matrix or evaluated price on their statements and online. This price reflects an estimate of the CD’s market value should the client sell their CD prior to maturity and does not reflect what a client will receive if he keeps their CD invested until maturity. The client will receive their initial investment amount plus the fixed rate interest per their original trade confirmation.

Most information about an offering can be found in the Preliminary Official Statement (POS). You may also call a Schwab Fixed Income Specialist at 877-786-4074, option 3, 8:30 a.m. - 6:00 p.m. EST.

The New Issue Calendar is updated daily online with available bond offerings.

Final price and details are available when a bond offering undergoes final pricing and bonds are allocated. All price and offer details are subject to change prior to the final pricing of each offering. If the price changes between the order period and the final pricing, customers with orders will be notified by email or phone as to the change in the bond terms and given an opportunity to cancel their order.

The cost for a new-issue municipal bond is the offering price. This price includes a selling concession (paid to Schwab) and is the same price you see on the calendar. There are no additional commissions or transaction fees. The typical minimum lot size for a new-issue municipal order is five bonds, or a face value of $5,000. Always refer to the POS (Preliminary Offering Statement) for details of trade minimums for each municipal issue as, in some instances, it can be higher.