What is Fixed Income?
Fixed Income describes securities where investors provide capital to corporations or a government for a set duration in return for regular interest payments and the original principal at maturity.
Fixed Income Securities: Investment Product Characteristics
Fixed income securities pay fixed interest expenses throughout the lending term until the date of maturity, which is when the full principal amount comes due.
As part of the financing transaction, the investor is compensated by:
- Periodic Interest Payments
- Original Principal Amount
Unique to the fixed income asset class, the focus is on capital preservation and a steady source of income – with the typical issuer comprised of governments and corporates.
Fixed Income Market Overview
Of the fixed income products issued, the top issuers are:
- Governments (Local, State, Federal)
- Corporate Issuers
Companies raise capital via fixed income issuances – i.e. corporate bonds – to fund their operations and to finance their growth plans. The type of companies that issue fixed income securities are typically mature, established companies, as opposed to early-stage high-growth companies.
Companies with low default risk are unlikely to miss interest payments or repay the principal (i.e. contractual breach), so risk-averse investors lend specifically to these types of companies.
Given the risk profile of most start-ups, finding adequate interest in the market (and at borrower-friendly lending terms) is improbable.
The purpose of government-issued securities is typically related to funding public projects (e.g. infrastructure, schools, roads, hospitals). For instance, a municipal bond is backed by a state or municipality, as opposed to the federal government – and is often exempt from taxes.
Fixed Income Securities Examples
The most common examples of fixed income products consist of the following:
- Treasury Bills (T-Bills)
- Treasury Notes (T-Notes)
- Treasury Bonds (T-Bonds)
- Corporate Bonds
- Municipal Bonds
- Certificates of Deposit (CDs)
