Fixed-Income Security

Definition

Fixed income securities are investment instruments that provide returns through periodic interest payments and the return of principal at maturity. Unlike variable income securities, the returns on fixed income securities are known and do not fluctuate based on underlying indicators such as short-term interest rates.

Origin

The history of fixed income securities dates back to when governments and corporations first issued bonds to raise funds. The earliest forms of bonds appeared in the medieval Italian city-states, while modern government bonds became popular in the 17th century in the Netherlands and England.

Categories and Features

Fixed income securities are primarily categorized into government bonds, corporate bonds, and municipal bonds. Government bonds are generally considered the safest as they are backed by the national credit. Corporate bonds typically offer higher risk and returns compared to government bonds, as they depend on the financial health of the issuing company. Municipal bonds are issued by local governments, often to fund public projects, and may offer certain tax advantages.

Case Studies

A typical example is the U.S. Treasury bonds, which are among the most popular fixed income securities globally due to their safety and liquidity. Another example is the corporate bonds issued by Apple Inc., which the company uses to raise funds for research and development and business expansion.

Common Issues

Investors in fixed income securities may encounter interest rate risk, where the value of existing bonds may decrease if market interest rates rise. Additionally, credit risk is a concern, especially in corporate bonds, where investors may suffer losses if the issuing company fails to meet its debt obligations.