Fixed income

Definition

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.

Types of fixed income

The most common types of fixed income include:

• Bonds: Debt securities issued by governments or corporations.
• Treasury securities: Issued by the U.S. Department of the Treasury, including treasury bills, notes, and bonds.
• Municipal bonds: Issued by state or local governments to fund public projects.
• Corporate bonds: Issued by corporations to raise capital, typically offering higher yields than government bonds.
• Fixed annuities: Insurance contracts where the insurer guarantees regular payments to the annuitant, often in retirement.
• Certificates of deposit (CDs): Time deposits offered by banks with fixed terms and interest rates.
• Preferred stocks: Stocks with fixed dividends that must be paid before common stock dividends.
• Fixed income ETFs: Exchange-traded funds that invest in a portfolio of fixed income securities, offering diversification and liquidity.
• Money market instruments: Short-term debt securities such as commercial paper and treasury bills, known for their high liquidity and safety.

Example of fixed income