Fixed income

Page written by AI. Reviewed internally on April 15, 2024.


Fixed income, in financial terms, refers to an investment category characterised by regular and predictable payments of interest or income over a specified period.

What is fixed income?

Fixed income is often associated with investments like bonds and other debt securities issued by governments, municipalities, corporations, and other entities.

The term “fixed income” originates from the fact that these investments offer a fixed interest rate or coupon payment to investors at regular intervals, typically semiannually or annually. The interest payments remain constant throughout the life of the investment, regardless of changes in market conditions.

Bonds are the most common type of fixed-income investment. When an investor buys a bond, they are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity. The interest rate offered by the bond is predetermined and provides investors with a predictable income stream.

Fixed-income investments are often favoured by those seeking stable and relatively low-risk returns. They are considered less volatile compared to other investments like stocks, making them attractive to risk-averse investors and those looking to preserve capital. However, it’s important to note that while fixed-income investments offer stability, they may have a lower potential for capital appreciation compared to higher-risk assets.

In summary, fixed income refers to investments that provide a predictable stream of income through regular interest payments, commonly associated with bonds and debt securities. It offers stability and is commonly chosen by investors seeking steady returns and income.

Example of fixed income

Imagine an investor purchases a 10-year government bond with a face value of £10,000 and an annual fixed interest rate of 3%. This bond pays interest annually.

  • Face value of bond: £10,000
  • Annual interest rate: 3%

The annual interest income from this bond would be calculated as follows:

Annual interest = Face value × Annual interest rate = £10,000 × 0.03 = £300

So, the investor receives £300 in interest income each year for the next 10 years. At the end of the bond’s term, they also receive the initial face value of £10,000.

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