Fixed Income Security

What is Fixed Income Security?

A fixed-income security is an investment that pays regular interest and returns the original amount you invested (the principal) when it matures. These are typically debt instruments, meaning the investor is lending money to an entity, such as a government or corporation, in exchange for regular interest payments.

Key Features

Fixed Interest Payments: These securities pay a set interest rate (called the coupon rate) regularly, which gives investors a predictable income stream.

Principal Repayment: When the security matures, the issuer pays back the original amount invested (the principal), which is different from stocks, as stocks don’t guarantee repayment.

Lower Risk: Fixed-income securities are generally considered safer than stocks, making them attractive to conservative investors looking for steady returns and capital preservation.

Common Types of Fixed-Income Securities

Bonds: These are issued by governments (like Treasury bonds) or companies to raise money.

Treasury Bills (T-Bills): Short-term government securities that don't pay interest but are sold at a discount.

Certificates of Deposit (CDs): Offered by banks, these are low-risk, interest-bearing time deposits with a fixed term.

Preferred Stocks: A type of stock that acts like a fixed-income security because it offers regular dividends and has priority over common stock in case of liquidation.

Asset-Backed Securities (ABS): Bonds backed by assets like loans, giving investors returns based on payments from those underlying assets.

Advantages

Capital Preservation: Fixed-income securities are safer investments that help protect your original investment, especially if held to maturity.

Diversification: Adding them to a portfolio can lower overall risk and reduce the impact of stock market volatility.

Disadvantages

Lower Returns: Fixed-income securities often offer lower returns than stocks, especially when interest rates are low.

Inflation Risk: If inflation rises faster than the interest rate, the value of the payments may decrease over time.

Default Risk: There's always a chance the issuer might fail to make interest or principal payments, especially with corporate bonds.