Fixed-income securities

Definition

Fixed-income securities are investment instruments that provide returns in the form of regular, fixed payments and the eventual return of principal at maturity. These securities are often issued by governments, municipalities, or corporations, making them a popular choice for investors seeking predictable income streams and lower risk compared to equities.

5 Must Know Facts For Your Next Test

1. Fixed-income securities are typically viewed as safer investments compared to stocks, as they provide predictable cash flows.
2. The primary types of fixed-income securities include bonds, treasury bills, and preferred stocks.
3. Interest rates and credit ratings significantly affect the pricing and yield of fixed-income securities.
4. Investors often use fixed-income securities to diversify their portfolios and mitigate risk during market volatility.
5. Maturity dates for fixed-income securities can vary widely, ranging from short-term (a few months) to long-term (30 years or more).

Review Questions

• How do fixed-income securities differ from equities in terms of risk and return?
  • Fixed-income securities generally offer lower risk and more predictable returns compared to equities. While equities can provide high returns during strong market conditions, they also come with greater volatility and potential for loss. Fixed-income securities provide regular interest payments and return of principal at maturity, making them more stable but typically yielding lower overall returns than stocks over time.
• Discuss the impact of changing interest rates on the value of fixed-income securities in the market.
  • When interest rates rise, the value of existing fixed-income securities usually falls because newer issues will offer higher yields. Conversely, when interest rates decrease, the value of existing bonds tends to increase as their fixed payments become more attractive. This inverse relationship is crucial for investors to understand when managing their portfolios, especially during periods of economic uncertainty or inflation.
• Evaluate how fixed-income securities can play a role in an investment strategy during economic downturns.
  • During economic downturns, investors often seek safety and stability, making fixed-income securities an attractive option. These investments can provide reliable income through regular coupon payments while preserving capital. Additionally, as stock prices fall, the relatively stable returns from fixed-income securities can help balance a portfolio's performance. A well-diversified strategy that includes fixed-income assets can minimize risk and volatility, allowing investors to weather financial storms more effectively.

Related terms

Bonds: Bonds are a type of fixed-income security that represents a loan made by an investor to a borrower, typically a corporation or government.

Coupon Rate: The coupon rate is the interest rate that the issuer of a fixed-income security pays to the bondholders, expressed as a percentage of the face value.

Yield to Maturity (YTM): Yield to Maturity is the total return anticipated on a fixed-income security if it is held until it matures, taking into account all coupon payments and the difference between purchase price and face value.