Fixed-income securities

Definition

Fixed-income securities are financial instruments that provide regular, fixed interest payments and return the principal upon maturity. Common examples include bonds and treasury bills.

5 Must Know Facts For Your Next Test

1. Fixed-income securities are considered less risky compared to equities but are still subject to interest rate risk.
2. The price of fixed-income securities inversely relates to interest rates; as rates rise, prices fall.
3. Default risk is the chance that the bond issuer will not make the promised payments.
4. Credit ratings from agencies like Moody's or S&P can help assess the default risk of these securities.
5. Yield to maturity (YTM) is a key measure used to evaluate the return on a fixed-income security.

Review Questions

• What happens to the price of fixed-income securities when interest rates rise?
• How do credit ratings influence the perceived risk of a fixed-income security?
• Explain what yield to maturity (YTM) represents for a bond.

Related terms

Bond: A debt instrument where an investor loans money to an entity for a defined period at a variable or fixed interest rate.

Interest Rate Risk: The risk that changes in market interest rates will affect the value of fixed-income securities.

Default Risk: The possibility that a bond issuer will fail to pay back the principal and interest as agreed.