FIXED INCOME SECURITIES

 WHAT ARE FIXED INCOME SECURITIES?

Fixed Income Securities are a type of debt instrument that provides returns in the form of regular, or fixed, interest payments and repayments of the principal when the security reaches maturity. Unlike   variable income securities, where payments change on some underlying measure – such as short term interest rates – the payments of a fixed income security are known in advance.

TYPES OF FIXED INCOME SECURITIES

There are four categories of fixed income investments. Short-term products return a low rate of interest, but you leave your money for only a few months at most. Long-term products pay a higher rate, but you have to leave your money invested for years.

·        SHORT TERM

The interest rates on these accounts are based on the Federal Reserve funds rate, or equivalent Treasury bill rates of four years or less. When the Federal Reserve funds rate was lowered to zero in 2008, these products earned super-low interest rates. Some of the short-term income securities are as follows:

1. Savings Accounts
2. Money Market Accounts
3. Certificates of Deposit
4. Money Market Funds
5. Short-term Bond Funds

·        LONG TERM

Long-term fixed income investments are called bonds. They are how organizations get substantial loans. Unlike loans, bonds can be bought or sold like any security. The interest rates on these accounts follow Treasury notes and bonds. The rate depends on the duration of the bond. Bond prices basically go down when stock prices go up. Bonds are lower return and lower risk than stocks. Investors buy them when they want to avoid risk. A few types of bonds are listed below.

1.      Government bonds

2.       Savings bonds

3.      Municipal bonds

4.      Corporate bonds

5.      Convertible bonds

6.      Eurobonds

·        FIXED INCOME DERIVATIVES

There are many financial derevatives that base their value on fixed income products. They have the most potential return because you invest less of your money. But if they lose money, you could lose much more than your initial investment. Sophisticated investors, companies, and financial firms use them to hedge against losses.

·       THIRD-PARTY FIXED INCOME PAYMENT STREAMS 

Some fixed income streams don't depend on the value of an investment. Instead, the payment is guaranteed by a third party. For example, Pensions.

RISKS OF INVESTING IN FIXED INCOME SECURITIES

Principal risks associated with fixed-income securities concern the borrower’s vulnerability to defaulting on its debt. Additional risks include exchange rate risk for securities denominated in a currency other than the US dollar (such as foreign government bonds) and interest rate risk – the risk that changes in interest rates may reduce the market value of a fixed-income security that an investor holds.