Fixed-Income Security
A fixed-income security is an investment that provides a return through fixed periodic interest payments and the eventual return of principal at maturity. Unlike variable-income securities, where payments change based on an underlying measure, such as short-term interest rates, the returns of a fixed-income security are known.
Definition: Fixed income securities are investments 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 change based on underlying indicators such as short-term interest rates.
Origin: The history of fixed income securities dates back to ancient times when governments and businesses 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 complexity of fixed income securities have increased, making them a crucial part of global financial markets.
Categories and Characteristics: Fixed income securities are mainly divided into government bonds, corporate bonds, and municipal bonds.
- Government Bonds: Issued by national governments, these are generally considered the safest investments because governments can raise taxes to repay debt.
- Corporate Bonds: Issued by companies, these carry relatively higher risk but usually offer higher interest returns.
- Municipal Bonds: Issued by local governments or municipal agencies, these are typically used to fund public projects such as roads and schools.
Specific Cases:
- Case 1: An investor purchases a $1,000 face value 10-year U.S. Treasury bond with an annual interest rate of 2%. The investor will receive $20 in interest payments each year and will receive the $1,000 principal back at the end of 10 years.
- Case 2: A company issues a batch of 5-year corporate bonds with an annual interest rate of 5%. After purchasing these bonds, investors will receive 5% interest payments each year and will get their principal back after 5 years.
Common Questions:
- Q: Will the interest payments on fixed income securities be affected by changes in market interest rates?
A: No. The interest payments on fixed income securities are fixed and do not change based on market interest rates. - Q: Are fixed income securities completely risk-free?
A: While fixed income securities have relatively low risk, they are not entirely risk-free. For example, corporate bonds may face the risk of the issuing company going bankrupt.
