Other Fixed-Income Products and Instruments

Not all fixed-income investing is about plain coupon bonds. Chapter 6.6 covers instruments that change the pattern of cash flows, the interest-rate exposure, the credit source, or the way investors access the market.

These products often appear in exam questions because they test whether students really understand the trade-off between structure and risk.

Money-Market and Bank-Related Instruments

Bankers’ Acceptances

A bankers’ acceptance is a short-term instrument created when a bank accepts responsibility for payment on a time draft. Because a bank stands behind the obligation, bankers’ acceptances are widely used in short-term funding and cash-management strategies.

Commercial Paper

Commercial paper is unsecured short-term corporate borrowing. It is normally issued at a discount and used by corporations that need flexible short-term financing.

These instruments belong conceptually with other fixed-income securities because they are debt claims, even though they are short term and more money-market oriented.

Deposit Products

Term Deposits

A term deposit places money with a financial institution for a defined period in exchange for interest.

Guaranteed Investment Certificates

GICs are term-based deposit products that generally offer a stated return over a specified period. They are common for conservative investors seeking predictable cash flow and low volatility, although liquidity can be limited before maturity depending on the product terms.

Students should distinguish deposit products from market-traded bonds. They may serve similar income objectives, but they do not trade the same way.

Floating-Rate Notes

A floating-rate note or FRN pays interest that resets periodically based on a reference rate plus or minus a spread.

At a high level:

• coupon payments adjust as rates move
• price sensitivity to interest-rate changes is often lower than for a similar fixed-rate bond
• income may rise when short-term rates rise

FRNs can be useful when investors want income exposure with less duration risk.

Strip Bonds and Zero-Coupon Structures

A strip bond pays no periodic coupon. Instead, it is purchased at a discount and returns par at maturity.

The investor’s return comes from the gap between purchase price and maturity value.

These instruments often have:

• higher sensitivity to interest-rate changes than coupon-paying bonds of similar maturity
• no reinvestment risk from coupons, because there are no coupon payments
• potentially different tax considerations from traditional coupon bonds

Students should distinguish between price volatility and cash-flow simplicity. Strip bonds are simple in structure but not necessarily low risk.

High-Yield and Asset-Backed Structures

High-Yield Bonds

High-yield bonds, sometimes called speculative-grade bonds, offer higher yields because they carry materially greater credit risk.

They may appeal to investors seeking more income, but they also tend to be more sensitive to:

• deteriorating business conditions
• economic downturns
• spread widening
• liquidity stress

Asset-Backed and Specialized Structures

Some fixed-income products are backed by pools of financial assets rather than by a simple direct corporate obligation. At the CSC level, students mainly need the idea:

• cash flows come from underlying assets
• structure affects repayment certainty
• complexity can increase analysis requirements

The exam usually tests category recognition and risk sources, not deep securitization mechanics.

Pooled Fixed-Income Access

Many investors access fixed income through bond mutual funds or bond ETFs rather than through direct security selection.

These pooled vehicles can offer:

• diversification
• professional management or index tracking
• easier portfolio access across many issuers and maturities

But they also mean the investor owns a fund structure rather than an individual bond with a fixed maturity date.

    flowchart LR
	    A[Other fixed-income securities] --> B[Bankers' acceptances and commercial paper]
	    A --> C[Term deposits and GICs]
	    A --> D[Floating-rate notes]
	    A --> E[Strip bonds]
	    A --> F[High-yield and asset-backed issues]
	    A --> G[Bond mutual funds and ETFs]

Choosing Among These Securities

The right choice depends on the investor’s objective.

• an investor worried about rising rates may prefer a floating-rate structure
• an investor targeting a known future amount may consider a strip bond
• an investor prioritizing certainty over tradability may consider deposit products
• an investor seeking diversified access may prefer a bond fund or ETF
• an investor reaching for yield may consider high-yield credit, but only with a clear understanding of default and spread risk

The exam angle is appropriateness. The highest yield is not automatically the best choice.

Key Terms

• Bankers’ acceptance: Short-term instrument accepted by a bank.
• Commercial paper: Unsecured short-term corporate debt.
• Floating-rate note: Bond with a coupon that resets periodically.
• Strip bond: Zero-coupon bond purchased at a discount and redeemed at par.
• GIC: Deposit product offering a stated return over a defined term.

Common Pitfalls

• Assuming strip bonds are low risk because they are simple.
• Treating high yield as extra income without extra credit risk.
• Forgetting that FRNs can reduce duration exposure but not eliminate credit risk.
• Assuming deposit products and bonds behave identically in liquidity and market pricing.
• Overlooking the difference between owning a bond fund and owning an individual bond.

Key Takeaways

• Other fixed-income securities broaden the market beyond plain coupon bonds.
• Each structure changes the source of return and the dominant risk.
• Strip bonds remove coupons but can still be volatile.
• Deposit products, money-market instruments, and pooled vehicles can meet different objectives from traditional bonds.
• CSC questions usually test matching structure to objective and risk tolerance.

Quiz

Sample Exam Question

An investor expects short-term interest rates to rise over the next year and wants fixed-income exposure with less price sensitivity than a traditional fixed-rate bond of similar credit quality. Which security is most appropriate?

• A. A long-term strip bond
• B. A floating-rate note
• C. A speculative-grade zero-coupon bond
• D. A long-term fixed-rate debenture

Correct answer: B.

Explanation: A floating-rate note resets its coupon periodically, so it is generally less sensitive to rising rates than a comparable fixed-rate bond. A strip bond would usually have greater rate sensitivity, not less. A speculative-grade zero-coupon bond adds major credit risk. A long-term fixed-rate debenture is exactly the type of security the investor is trying to avoid.