Fixed income investments are a type of investment or investment asset class that is made up of securities that have a fixed price and pay some sort of interest at regular intervals. Here are some examples of fixed income investments:
- Bonds – There are many different types of bonds but one of the more famous types is US government treasuries. I-bonds, municipal tax free bonds are other examples. These are the traditional type of fixed income investments where the investor buys the bond from an issuer, receives regular interest payments and then at the end of the term, receives their original investment back.
- Zero coupon bonds – These are bonds where there are no actual interest payments but instead the investor buys the bond from the issuer at a discount from the bond face value and after a number of years (the term), the investor gets the face value amount from the issuer. The interest payments in this case are implied rather than paid direct.
- TIPS – Treasury Inflation Protected Securities – These are bonds that are adjusted annually to reflect changes in the rate of inflation as measured by the consumer price index.
- Preferred shares – These are hybrid securities which pay dividends but share some of the characteristics of bonds along with equities.
- Certificate of Deposits – CDs are usually available from banks and brokerages.
Fixed income investments secondary market
Fixed income investments can be purchased from an issuer which might be the United States government in the case of treasuries or from a company. They can also be bought and sold in the secondary market which will be a transaction between two investors. Secondary market transactions will value the bond at the current market rate – there are various factors which affect the price of bonds.
Differences between fixed income investments and equities
The main differences are:
- Bonds retain their nominal value. A bond with a $1000 face value will be worth $1000 at the end of the term.
- Bonds pay interest. Some stocks pay dividends but a lot don’t.
- A fixed income investment is a loan to a government or a company. A stock purchase means you are a part owner of a company.
- Governments issue bonds but never issue stock.
Reasons to own fixed income investments – asset allocation
The reason investors own fixed income is for safety and diversification. While stocks are a great investments for the long term, sometimes they fall in price. 2008 was a very volatile year for equity investors and the investor who owned some bonds along with her stocks probably slept a lot better than the investor who was 100% invested in equities.