Fixed income is a type of investment popular among investors who seek a steady and predictable return on their investment. The term “fixed income” refers to investments paying a fixed rate of interest, typically on a regular schedule, such as monthly or quarterly. These types of investments are important for many retirees.
Fixed income securities
Fixed income securities are essentially debt instruments issued by corporations, governments or other entities to raise funds. These securities, also known as bonds or notes, come with a predetermined interest rate and a set date of maturity. Essentially, by purchasing the fixed income security, an investor is loaning the issuer money which will be repaid along with interest. Upon reaching maturity, the issuer of the bond repays the principal amount to the investor.
Coupon rate
The interest rate, also known as the coupon rate, is the rate at which the bond issuer pays interest to the bondholder. The coupon rate is fixed at the time of issuance and remains constant throughout the life of the bond. The interest payment is usually made on a regular schedule, such as monthly or quarterly, and the payment amount is calculated based on the face value of the bond and the coupon rate.
Benefits of fixed income securities
One of the key benefits of fixed income investments is they offer a predictable stream of income to investors. Unlike stocks, which may fluctuate in value, fixed income securities provide a steady rate of return. This makes them an attractive option for investors who are looking for a stable income stream, such as retirees or those who are nearing retirement.
Different types of fixed income securities
There are several different types of fixed income securities available, each with its own unique features and risks. Some of the most common types of fixed income investments include Treasury bonds, corporate bonds, municipal bonds, high-yield bonds and certificates of deposit (CDs).
Treasury bonds
These are bonds issued by the US government and are considered to be one of the safest investments available. They offer a fixed rate of return and are backed by the full faith and credit of the US government.
Corporate bonds
These are bonds issued by corporations to raise capital. They typically offer a higher yield than government bonds but also carry a higher level of risk.
Municipal bonds
These are bonds issued by state and local governments to fund public projects. They are often exempt from federal taxes and may also be exempt from state and local taxes, making them an attractive option for investors looking to minimize their tax liability.
High-yield bonds
Also known as junk bonds, these are bonds issued by companies with lower credit ratings. They offer a higher yield than other types of fixed income securities but also carry a higher level of risk.
Certificates of deposit (CDs)
These are deposits made with a bank or other financial institution for a fixed term, typically ranging from a few months to several years. They offer a fixed rate of return and are insured by the Federal Deposit Insurance Corporation (FDIC).
Fixed income for your portfolio
While fixed income securities may not offer the potential for high returns that stocks do, they can be an important part of any well-diversified investment portfolio. How much of your portfolio should be dedicated to fixed income securities may depend on what stage of life you are in. Younger investors may want to have more assets with higher returns and less fixed income investments, while retirees may want to have mostly fixed income securities.