FIXED INCOME. Consistent Revenue A WIDER VIEW TM

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1 FIXED INCOME Consistent Revenue A WIDER VIEW TM

2 It s time for A WIDER VIEW. TM It s the view that says stocks, bonds, mutual funds, annuities, life insurance, every type of investment has to make a contribution to your goals. Every dollar has to pull its weight. Even assets we don t manage come into play. This wider perspective enables us to identify synergies others may not even see. Welcome to People s Financial Advisors. People s makes it easy to understand your options and get the financial solutions you need. Come talk with us today. Call: Click: peoples.com Visit: Any branch 1

3 People s Bond Advantage People s Financial Advisors is dedicated to bringing you the best investment support available today for fixed income securities. Our bond program allows us to bring you select offerings on just about any bond investment. Through Fixed Income Securities we have access to the industry s largest databases of bond market offerings, consisting of tens of thousands of listings compiled from several hundred dealers nationwide. And your investment choices are not limited to a narrow selection of proprietary offerings! We know that customers frequently feel at a disadvantage in the bond markets because some investment firms only show you bonds to purchase that they have in their proprietary inventory. Our approach to the investment process is quite different. We get you straightforward recommendations and access to the complete world of fixed income investments with one call. Most financial advisors recommend that investors maintain a diversified investment portfolio consisting of bonds, stocks and cash in varying percentages, depending upon individual circumstances and objectives. Predictable Income Because bonds typically have a predictable stream of payments and repayment of principal, many people invest in them to preserve and to increase their capital or to receive dependable interest income. Whatever the purpose saving for your children's college education or a new home, increasing retirement income or any of a number of other worthy financial goals investing in bonds can help achieve your objectives. That s especially true for retirement planning. During the past decade, the traditional fixed-benefit retirement plans (Defined Benefit Plans) have increasingly been replaced by defined contribution programs, such as 401(k) plans. While these plans offer greater individual freedom in selecting from a range of investment options, investors must also be increasingly self-reliant in securing their retirement lifestyles. 2 3

4 An Array of Choices The diversity of fixed-income securities present investors with a wide variety of choices to tailor investments to their individual financial objectives. Whatever your goals, our Financial Advisors can help explain the numerous investment options available to help you reach them, taking into account your income needs and tolerance for risk. M U.S. Government Bonds M Corporate Bonds & Notes M Municipal Bonds M Zero Coupon Bonds M Certificates of Deposit M Mortgage Backed Securities M Bond Ladders U.S. Government Bonds These bonds are backed by the full faith and credit of the United States government. The benefits of these bonds include: M Predictability: these bonds are typically not callable. M Liquidity: a wide range of maturity dates allows you to tailor your portfolio to meet your cash flow needs. M Safety: this investment carries the strongest guarantee that the interest and principal will be repaid on time. M Tax-Exemption: these bonds are exempt from state and local taxes Many people invest in U.S. Government Bonds to preserve and grow their net worth and to receive dependable income for retirement expenses, college tuition, etc. 4 5

5 Corporate Bonds These are corporate debt instruments issued by private and public corporations mostly trading over-the-counter. You may want to purchase corporate bonds for a variety of reasons: Municipal Bonds Municipal bonds are debt obligations issued by counties, cities, states and other government entities to raise money for public projects. Municipal bonds offer many advantages to the tax-conscious investor: M Desirable Yields: they usually have greater yields than government bonds or CDs with similar maturity dates although the higher yields come with greater risk. M Reliable Income: they provide steady income, while preserving your principal. M Diversity: they provide a wide range of choices from different sectors, structures and credit quality characteristics. M Marketability: because they trade over-the-counter if you need to sell a bond before maturity you can do so fairly easily. M Safety: these bonds are evaluated and rated based on credit history and ability to repay loans allowing you to select the level of risk you are willing to accept. M Predictable stream of income; M Marketability if you must sell before maturity; M Wide range of choices for different investment objectives; M High degree of safety for repayment of principal and interest; M Attractive current income free from Federal and in some cases state and local taxes. EFFECT OF FEDERAL INCOME TAXES ON YIELDS OF TAX-EXEMPT AND TAXABLE INSTRUMENTS: 5.0% TAX-EXEMPT BOND 7.5% TAXABLE BOND CASH INVESTMENT $30,000 $30,000 INTEREST $1,500 $2,250 FEDERAL INCOME TAX IN THE 35% MARGINAL TAX BRACKET $0 $787 NET RETURN $1,500 $1,463 YIELD ON INVESTMENT AFTER TAXES 5.0% 4.9% 6 7

6 Zero Coupon Bonds These deep discount bonds are priced at a fraction of their face value. Maturities are available from 1 to 30 years. These are ideal investments for tax advantaged investment accounts like Pension Funds, Keoghs, and IRAs. STRIPS are a direct issue of the U.S. Government and are not subject to state income tax. Zero coupon bonds do not pay interest until maturity and their day-to-day market values tend to be more volatile than bonds that pay periodic interest. ESTIMATED FUTURE VALUE OF A 20-YEAR 5.5% ZERO COUPON MUNICIPAL $6, PURCHASE $20, $20, $15, $15, $11, $10, $8, $6, $5, $ Certificates of Deposit (CDs) With a CD you agree to place your funds on deposit for a set period of time and in return you receive a stated rate of interest. These offerings are compiled from leading financial institutions across the nation and are insured by the FDIC up to $100,000. Typically the longer period you are willing to invest the higher rate of return you will receive. Source: The Bond Market Association All fixed income securities, including U.S. Government bonds, are subject to dayto-day market value fluctuations. If sold prior to maturity, they may be worth more or less, or just the same as your original investment. The accreting value of zero coupon investments may be subject to tax even though the interest is not actually received until maturity. 8 9

7 Mortgage Backed Securities 2 These are U.S. Government or Agency guaranteed securities that offer monthly income for the institutional and retail investor alike. In general, Mortgage Backed Securities (MBS) pay principal and interest on a convenient monthly basis. They are not guaranteed by the U.S. Government. Investors in mortgage securities also earn a stated rate of interest, but they receive repayments of their principal in increments over the life of the security, as the underlying mortgage loans are paid off, rather than in a single lump sum at maturity. With fixed-income securities such as municipal bonds, an investor lends money to the bond issuer in return for a stated rate of interest over the life of the bond. The investor receives a repayment of principal in a single lump sum when the bond matures. 2 The average life and yield of mortgage backed securities, like GNMAs or Collateralized Mortgage Obligations (CMOs), can vary depending on the speed of prepayment of the underlying mortgages. This future speed of prepayment can be estimated but is still somewhat unpredictable. Generally, as interest rates decline, mortgages prepay faster which can decrease the average life of a mortgage bond. Similarly, as interest rates rise, prepayments tend to slow which can lengthen the average life. GNMA mortgage collateral represents a full faith and credit obligation of the United States. Mortgage collateral backed by the Federally Sponsored Enterprises of the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA) are fully and unconditionally guaranteed by FHLMC and FNMA and are not obligations of the United States. These guarantees refer only to the return on principal and interest and NOT to the market value of the investment. Bond Ladders If you want to minimize the effects of fluctuating interest rates on your fixed income portfolio, Bond Ladders may be of interest to you. Constructing a Bond Ladder is an effective method that can help to protect your financial nest egg from market value fluctuations. A Bond Ladder is a series of bonds with set maturity dates, specifically selected to match your life goals and investment objectives, taking into consideration: 1. The amount of money you have to invest 2. The time span, initial and final maturity dates 3. Event horizons specific to you (retirement date, business sale date, etc.) 4. Your investment beliefs and risk tolerance 5. Your tax bracket and future tax obligations The sequential bond maturities ensure that you have a portion of the portfolio in short term bonds which can minimize the risks from rising interest rates. The longer term portion of the portfolio should provide you higher yields

8 Investment Considerations There are a number of factors to consider when investing in bonds. These variable determine the value of the bond and how it fits into your investment plan. Some of the factors include: M Redemption Features M Credit Quality M Credit Rating M Maturity M Interest Rate Financial Solutions At People s, we specialize in helping our clients prepare for their children s educational expenses, plan for their retirement and ensure that all of the financial pieces of their lives fit together. Come see us to find out how fixed income investments fit into your investment plans. We can help you structure all of your investments, insurance and banking products so that they make the maximum contribution to your goals. You can get there with People s Financial Advisors. M Price M Yield We will take all of these factors into consideration when building your investment portfolio. WHEN INTEREST RATES RISE % BOND PRICES FALL $ A W I D ER VIEW TM Call: Click: peoples.com Visit: Any branch 12 13

9 A WIDER VIEW TM Come see how A WIDER VIEW can help you get the best investment, banking and protection products for you. Call: Click: peoples.com Visit: Any branch People s Financial Advisors is a division of People s Securities, Inc. member NASD and SIPC. Investment and insurance products are offered through People s Securities, Inc. a subsidiary of People s Bank. Investment and insurance products are not deposits or other obligations of, and are not guaranteed by People s Bank or any other affiliates, are not insured by the FDIC, by any other government agency, or by People s Bank or any of its affiliates, and may involve risk, including possible loss of principal. MKT-646 8/04