Fixed Income Securities Definition
What are fixed income investments? Fixed income securities are financial instruments that represent debt obligations. A company, government, or other organization can raise funds by issuing debt instruments to investors. The issuing entity agrees to make periodic interest payments to the investor. Then the issuing entity repays the principal amount at the end of the contract.
With debt instruments, the issuer is essentially borrowing money from the investor. The investor plays the role of a lender lending money to the issuing entity. Debt instruments also represent a claim on the assets of the issuing entity. In addition, you can trade fixed income securities on secondary markets. Many often call debt securities fixed-income securities. This is because the issuer often predetermines the terms of the debt instrument.
For example, a debt instrument will be issued with a certain maturity, a certain principal amount, and a set coupon rate; however, while debt securities are often called fixed-income securities, this does not mean they yield a fixed stream of payments. In fact, debt securities’ returns can fluctuate and vary.
Fixed Income Yield
Now, refer to fixed income yield as the return on the instrument. Fixed income investments issued by companies with poor credit or a higher risk of default will have higher yields than fixed income securities issued by companies with good credit or less risk of default. As a result, higher yields on riskier fixed income investments compensate the investor for the higher risk of default. Short-term debt instruments often have comparatively lower yields. Whereas, longer-term debt securities often yield higher returns than short-term debt or money market instruments.
Fixed Income Security Examples
- Treasury notes
- Treasury bonds
- Inflation-protected treasury bonds
- Federal agency debt
- International bonds
- Municipal bonds
- Corporate bonds
- Junk bonds
- Mortgage-backed securities
- Other types of debt