Fixed Income
Fixed income broadly refers to those types of investment security that pay investors fixed interest or dividend payments until their maturity date. At maturity, investors are repaid the principal amount they had invested. Government and corporate bonds are the most common types of fixed-income products.Unlike equities that may pay out no cash flows to investors, or variable-income securities, where payments can change based on some underlying measure—such as short-term interest rates—the payments of a fixed-income security are known in advance and remain fixed throughout.In addition to purchasing fixed-income securities directly, there are several fixed-income exchange-traded funds (ETFs) and mutual funds available to investors.
Definition: Fixed income broadly refers to investment securities that pay fixed interest or dividends to investors until maturity. At maturity, investors are repaid the principal amount of their investment. Government and corporate bonds are the most common fixed income products. Unlike stocks, which may not pay cash flows to investors, or variable income securities, which change payments based on certain underlying metrics (such as short-term interest rates), fixed income securities have known and constant payment schedules. In addition to directly purchasing fixed income securities, there are several fixed income exchange-traded funds (ETFs) and mutual funds available to investors.
Origin: The history of fixed income securities can be traced back to ancient times when governments and merchants issued bonds to raise funds. The development of the modern fixed income market began in 17th-century Europe, particularly in the Netherlands and the United Kingdom. Over time, the types and complexities of fixed income products have increased, becoming a crucial part of the global financial market.
Categories and Characteristics: Fixed income securities are mainly divided into government bonds, corporate bonds, municipal bonds, and agency bonds.
- Government Bonds: Issued by national governments, these are generally considered the safest investments as they are backed by government credit.
- Corporate Bonds: Issued by companies, these carry higher risk but usually offer higher yields.
- Municipal Bonds: Issued by local governments or municipal agencies, typically used to fund public projects.
- Agency Bonds: Issued by government-supported enterprises or international organizations, with risk and returns between government and corporate bonds.
Specific Cases:
- Case One: An investor purchases a $1,000 face value 10-year U.S. Treasury bond with a 2% annual interest rate. Each year, the investor will receive $20 in interest, and at maturity, they will receive the $1,000 principal.
- Case Two: A company issues a batch of 5-year corporate bonds with a 5% annual interest rate. After purchasing these bonds, investors will receive 5% interest annually and the principal at maturity.
Common Questions:
- Are fixed income investments risky? While fixed income securities are generally considered safer investments, they still carry credit risk, interest rate risk, and inflation risk.
- How to choose the right fixed income product? Investors should select suitable fixed income products based on their risk tolerance, investment horizon, and return objectives.
