Key Market Facts

June 30, 2003

Level YTD Indices     S&P 500 974.50 10.76% DJIA 8985.44 7.72% S&P/TSX 6983.14 5.57% Currencies / Commodities CAD / US 1.3543 -13.94% US / EURO 1.1449 9.17% Gold $US 346.60 -0.46% Crude Oil $US 30.19 -3.24% Natural Gas $US 5.411 12.99% Interest Rates Canadian Bank Rate 3.50% 0.50% Canadian Prime Rate 5.00% 0.50% Fed Funds Rate 1.00% -0.25% Us Prime Rate 4.00% -0.25%

In today’s low interest rate environment, investing for income becomes an even greater challenge for retirees or individuals looking to enhance their current incomes through investments that provide steady cash flow while protecting capital.

There are several types of investments that pay income; each type has associated with it a certain amount of risk. In general the higher the return the higher the amount of risk involved. Some examples of income generating securities are, government and corporate bonds, mortgage-backed securities, income trusts and preferred shares.

Government and Corporate Bonds
Bonds are usually the largest component of an income-oriented investment portfolio. There are several types of bonds: marketable bonds issued by the various levels of government: municipal, provincial and federal, savings bonds issued by the federal and many provincial governments and corporate bonds which are issued by corporations. There are two main components to a bond. First, a loan you make to the bond issuer, your principal, which is repaid on the maturity date and second, the interest payments you receive in return, usually on a monthly, semi-annual or annual basis.

Conventional marketable bonds are available for trading on bond markets and the prices can fluctuate with changes in interest rates. As interest rates move up, the value of bonds decreases and as interest rates move down, bond values increase. A capital gain can occur when you buy a bond below par or if you sell a bond at a premium to the purchase price. A capital loss can occur when you buy a bond above par or if you sell a bond at a discount to the purchase price.

When buying a bond it is also important to understand the difference between the coupon rate and the yield to maturity. For conventional bonds, coupons payments are fixed for the entire period of the bond however the yield that a bond is available at will vary from minute to minute as market interest rates change. The yield is the return that you make on your bond investment, not the coupon rate.

In the current interest rate environment long term and medium term bonds are not attractive investments as current yields are very low with little room to move except up. When interest rates move higher, the value of these bonds will fall. When choosing a bond for your portfolio you must consider the credit quality of the issuer of the debt and your liquidity requirements. The lower the credit quality and the liquidity, the higher the yield however this also implies higher risk for your capital

Mortgage Backed Security
A mortgage backed security (MBS) is issued by a financial institution that pools a number of government-insured mortgages together and sells you a portion of the insured mortgage pool. You receive a monthly mortgage payment consisting of interest and a small portion of the principal. The payment structure is set up exactly the same as that of a mortgage except that you are the recipient of the payment. At maturity, the final interest payment and the remaining principal are returned to you. It is possible to sell a MBS before maturity however the amount you will receive will be reduced by any principal payments you have already received. MBSs are guaranteed by the Canadian government through the Canada Mortgage and Housing Corporation.

Income Trusts
There are two variations of Canadian income trusts; a royalty trust, which is restricted to domestic Canadian resource properties and an income fund, which has fewer restrictions as to the assets they can hold. Income trusts trade on equity markets and are therefore not guaranteed. Distribution yields are significantly higher than other income generating securities however the sustainability of the distribution is dependent on current interest rates and the price of the underlying commodity associated with the trust. They are therefore not guaranteed.

Preferred Shares
Preferred shares are another alternative for income investors. Like income trusts, preferred shares trade on equity markets and are not guaranteed however a preferred share with a high credit rating may be appropriate for some income-oriented investors. Preferred shares are issued by corporations and pay dividends, which have priority over any dividends paid to common shareholders.

Impact of Taxes on Income
Interest income has the least favourable tax treatment. Dividends paid by Canadian corporations receive more tax favourable treatment because of the dividend tax credit that is applied to them. Capital gains receive the most favourable treatment of all. For tax purposes, income trust distributions can be made up of interest income, dividend income and return of capital. The actual breakdown will differ for each income trust. If you would like additional information on investing for income please contact me directly at 604 257-7055.

Insured Annuity

An insured annuity is a strategy used primarily by retirees to maximize after-tax retirement income without increasing investment risk.

With an insured annuity you can 1) earn a pre-tax equivalent yield likely unattainable with today’s fixed income investments 2) lower your taxes payable and increase your chances of securing government benefits and 3) create a guaranteed income stream that will last both you and your spouse your entire lifetime.

The concept of an insured annuity combines two individual products: a life annuity and a life insurance policy. The life annuity provides a much higher level of income than other types of investments, as the payments you receive are a combination of interest and your original capital. By packaging the annuity with an insurance product your premiums are paid using a portion of your annuity payment and you ensure that the original capital is restored to your beneficiaries upon your death. These assets will also avoid probate as they transfer to beneficiaries outside of the will.

A corporate insured annuity has additional estate benefits for small business owners. To find out more on these products, please give call me at 604 257-7055.

Did You Know?

The rule of 72 is a very simple way to roughly determine how many years it will take to double your investment given a fixed annual rate of return. Alternatively, if you want to know approximately what annualized rate of return you require to double your money in a fixed number of years, this rule is also very useful.

Example 1: If my investments were to grow at an annual rate of 5% per year, how many years approximately would it take to double my money?

Answer 1: 72 / 5 = 14.4 years

Example 2: If I want my investments to double in ten years, approximately what annual rate of return would I need to achieve?

Answer 2: 72 / 10 = 7.2%

RBC Dominion Securities Inc. is a member company under RBC Investments. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc. and Royal Bank of Canada are separate corporate entities which are affiliated. Investment Advisors are employees of RBC Dominion Securities Inc. Member CIPF. ?Trademark of Royal Bank of Canada. RBC Investments is a registered trademark of Royal Bank of Canada. Used under licence.©Copyright 2003. All rights reserved

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