Definition
A fixed-income security refers to an investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. These securities include government and corporate bonds, preferred stock, and other assets that pay a predetermined amount of interest or dividend. This makes them popular among conservative investors seeking a steady cash flow or retirees seeking stable interest income.
Phonetic
The phonetics of the keyword “Fixed-Income Security” would be: “fikst – in – kuhm si – kyoor – i-tee”.
Key Takeaways
- Definition: Fixed-income securities are investment products that provide a return in the form of fixed periodic interest payments and the eventual return of the principal at maturity. They are mainly issued by governments, municipalities, and corporations.
- Risk and Return: Fixed-income securities are considered as comparatively safer investments. While they may offer lower returns compared to equity investments, their risk associated is also lesser because they provide a steady and predictable source of income. However, they are not completely risk-free and can be influenced by interest rate movements, credit risk, and inflation.
- Varieties of Fixed-Income Securities: There are numerous types of Fixed-Income Securities including Treasury Bills (T-Bills), Corporate Bonds, Municipal Bonds, Certificates of Deposit, and Preferred Stocks. Each type has its own unique set of features, benefits and risks, catering to diverse investment objectives and risk profiles of investors.
Importance
Fixed-Income Security is a vital term in business/finance as it represents a type of investment that provides a return in the form of fixed periodic payments, and it includes the eventual return of the principal at maturity. The importance lies in its predictability and decreased risk compared to other investments. It’s a suitable option for conservative investors seeking to preserve capital and generate steady, predictable income. Fixed-income securities are crucial for companies or governments to borrow money and finance their operations. For investors, these securities present low-risk investment alternatives and a reliable income stream which can offset potential risks from other parts of their portfolio.
Explanation
Fixed-income security serves a crucial role in the financial sector as it offers investors a reliable and predictable stream of income. This type of security is essentially a contract whereby the issuer or borrower commits to making a specified payment to the investor or lender on specified dates. This provides a steady flow of income which is why they are often utilized by investors looking for less risky investments, ones that can provide stable returns without the volatility often associated with stocks or commodities. Fixed-income securities, such as bonds or treasury bills, are common in the portfolios of retirement or pension funds where stability and predictability is desired.Furthermore, fixed-income security is also a beneficial tool from the borrower’s perspective. Companies or governments often issue bonds and other such securities to raise capital for their operations or projects. By issuing these securities with a fixed return rate, they are able to predict and plan for the cost of their debt service. Fixed-income securities thus offer a balance of benefits, providing reliable income for investors and a steady source of capital for issuers. They are an integral part of the broader system of financial instruments that facilitates the transfer of funds from parties with excess capital to those requiring them.
Examples
1. U.S. Treasury Bonds: These are considered one of the safest fixed-income securities, backed by the credit of the U.S. government. Investors who buy these bonds lend money to the government. In return, the government promises to pay a specified rate of interest during the life of the bond and to repay the principal when the bond matures.2. Corporate Bonds: Companies often issue bonds to raise capital for business expansion. Like Treasury bonds, corporate bonds pay interest to bondholders and return the principal amount at maturity. However, they carry more risk than government bonds because they are not backed by the U.S. government.3. Municipal Bonds: These are issued by states, cities, or counties to finance capital expenditures like the construction of highways, bridges, or schools. These bonds offer a fixed rate of interest and return the principal amount at maturity. They are less risky than corporate bonds, and the interest payments are usually exempt from federal income tax and, in some cases, state and local taxes.
Frequently Asked Questions(FAQ)
What is a Fixed-Income Security?
A Fixed-Income Security is a type of investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity.
How does a Fixed-Income Security work?
The issuer of a Fixed-Income Security is obliged to make fixed payments to the investor on predetermined dates and return the principal amount on the maturity date.
What are examples of Fixed-Income Securities?
Bonds, treasury bills, corporate bonds, money market instruments, and preferred stock are all examples of Fixed-Income Securities.
Who would be interested in a Fixed-Income Security?
Investors looking for lower-risk and a predictable income stream, such as retirees or conservative investors, would be interested in Fixed-Income Securities.
When do investors receive payments for their Fixed-Income Security?
Payments from Fixed-Income Securities typically happen on a fixed schedule, such as annually, semi-annually, quarterly, or monthly.
What are some of the risks associated with Fixed-Income Securities?
The main risks include interest rate risk (fluctuations in interest rates may affect the value of the investment), credit risk (the issuer may default or be unable to make payments), and inflation risk (the fixed return may lose value over time due to inflation).
Can a Fixed-Income Security be sold before maturity?
Yes, most Fixed-Income Securities can be sold before maturity. However, the price received might be more or less than the original cost, depending on the interest rate environment and the credit quality of the issuer.
How are Fixed-Income Securities taxed?
The interest income from Fixed-Income Securities is typically taxed as ordinary income. However, certain types of fixed-income securities may offer tax advantages. For example, interest income from Municipal Bonds is usually exempt from federal taxes.
How can I purchase a Fixed-Income Security?
Fixed-Income Securities can usually be purchased directly from the issuer, through a brokerage, or on a secondary market.
What is the difference between a Fixed-Income Security and an Equity Security?
The main difference is that with a Fixed-Income Security, the issuer is borrowing money from the investor and must pay them back with interest, while an Equity Security represents ownership interest in a company.
Related Finance Terms
- Bond
- Coupon Rate
- Maturity Date
- Principal Amount
- Interest Payments
Sources for More Information
