Fixed Income

Fixed income broadly refers to those types of investment security that pay investors fixed interest or dividend payments until their maturity date. At maturity, investors are repaid the principal amount they had invested. Government and corporate bonds are the most common types of fixed-income products.

Unlike equities that may pay out no cash flows to investors, or variable-income securities, where payments can change based on some underlying measure—such as short-term interest rates—the payments of a fixed-income security are known in advance and remain fixed throughout.

In addition to purchasing fixed-income securities directly, there are several fixed-income exchange-traded funds (ETFs) and mutual funds available to investors.

Fixed income is a class of assets and securities that pay out a set level of cash flows to investors, typically in the form of fixed interest or dividends. Government and corporate bonds are the most common types of fixed-income products. They are known as fixed-income because they pay a fixed interest rate credited to investors.

At maturity for many fixed income securities, investors are repaid the principal amount they had invested in addition to the interest they have received. In the event of a company’s bankruptcy, fixed-income investors are often paid before common stockholders.

Companies and governments issue debt securities to raise money to fund day-to-day operations and finance large projects. For investors, fixed-income instruments pay a set interest rate return in exchange for investors lending their money. At the maturity date, investors are repaid the original amount they had invested—known as the principal.

For example, a company might issue a 5% bond with a $1,000 face or par value that matures in five years. The investor buys the bond for $1,000 and will not be paid back until the end of the five years. Over the course of the five years, the company pays interest payments—called coupon payments—based on a rate of 5% per year. As a result, the investor is paid $50 per year for five years. At the end of the five years, the investor is repaid the $1,000 invested initially on the maturity date. Investors may also find fixed-income investments that pay coupon payments monthly, quarterly, or semiannually.

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