Fixed-Income

Definition

Fixed-income refers to investments that provide a predetermined, consistent stream of income, typically in the form of interest payments, over a specified period of time. These investments are often considered less risky than investments with variable returns, making them a popular choice for individuals seeking stability and predictability in their financial portfolios.

5 Must Know Facts For Your Next Test

1. Fixed-income investments are often used to provide a steady stream of income and to diversify an investment portfolio.
2. The value of fixed-income securities can fluctuate due to changes in interest rates, with prices generally moving inversely to interest rates.
3. Investors in fixed-income securities are typically more concerned with the safety of their principal than with potential capital appreciation.
4. Government bonds, corporate bonds, and municipal bonds are common types of fixed-income securities.
5. The yield on a fixed-income investment is influenced by factors such as the creditworthiness of the issuer, the term to maturity, and prevailing market conditions.

Review Questions

• Explain how fixed-income investments can provide stability and predictability in an investment portfolio.
  • Fixed-income investments, such as bonds, offer a predetermined and consistent stream of income in the form of interest payments. This predictable cash flow can help offset the volatility of other investments, like stocks, in a diversified portfolio. The relatively low-risk nature of fixed-income securities also makes them attractive to investors seeking stability and a reliable source of income, particularly in retirement or during periods of market uncertainty.
• Describe how changes in interest rates can impact the value of fixed-income securities.
  • The value of fixed-income securities is inversely related to changes in interest rates. When interest rates rise, the market value of existing fixed-income securities with lower yields will decrease, as new securities with higher yields become more attractive to investors. Conversely, when interest rates fall, the market value of existing fixed-income securities will increase, as their yields become more competitive. This inverse relationship between interest rates and bond prices is a key concept for understanding the risk and return dynamics of fixed-income investments.
• Analyze the role of fixed-income investments in the context of the 'Confusion Over Inflation' discussed in Section 22.4.
  • In the context of the 'Confusion Over Inflation' discussed in Section 22.4, fixed-income investments can play a crucial role in helping investors navigate the challenges posed by inflation. Fixed-income securities, such as government bonds, typically offer a fixed rate of return that is not directly tied to the rate of inflation. This can provide a level of stability and predictability in an investor's portfolio, as the purchasing power of the fixed interest payments may be less affected by fluctuations in the inflation rate compared to investments with variable returns. However, prolonged periods of high inflation can still erode the real value of fixed-income investments over time, highlighting the importance of diversification and considering the potential impact of inflation when constructing a balanced investment strategy.

Related terms

Bonds: Bonds are a type of fixed-income security that represent a loan made by an investor to a borrower, typically a government or corporation, in exchange for regular interest payments and the return of the principal amount at maturity.

Yield: Yield is the return an investor receives on a fixed-income investment, typically expressed as a percentage of the investment's face value or current market price.

Duration: Duration is a measure of a fixed-income security's sensitivity to changes in interest rates, which can affect the security's market value.