Fixed income refers to any type of
investmentthat yields a regular (or fixed) return.
For example, if you lend money to a borrower and the borrower has to pay
interestonce a month, you have been issued a fixed-income security. When a company does this, it is often called a bond or corporate bank debt (although " preferred stock" is also sometimes considered to be fixed income). Sometimes people misspeak when they talk about fixed income. Bonds actually have higher risk, while notes and bills have less risk because these are issued by government agencies.
The term fixed income is also applied to a person's income that does not vary with each period. This can include income derived from fixed-income investments such as bonds and
preferred stocks or pensionsthat guarantee a fixed income. When pensioners or retirees are dependent on their pension as their dominant source of income, the term "fixed income" can also carry the implication that they have relatively limited discretionary incomeor have little financial freedom to make large expenditures.
Fixed-income securities can be contrasted with variable return securities such as
stocks. To understand the difference between stocks and bonds, you have to understand a company's motivation. A company wants to raise money, and it doesn't want to wait until it has earned enough through ongoing operations (selling products or providing services). In order for a company to grow as a business, it often must raise money; to finance an acquisition, buy equipment or land or invest in new product development. Investors will only give money to the company if they believe that they will be given something in return commensurate with the risk profile of the company. The company can either pledge a part of itself, by giving equity in the company ( stock), or the company can give a promise to pay regular interestand repay principal on the loan (bond or bank loan) or (preferred stock).
While a bond is simply a promise to pay interest on borrowed money, there is some important terminology used by the fixed-income industry:
issueris the entity (company or govt.) who borrows an amount of money (issuing the bond) and pays the interest.
*The principal (of a bond) is the amount that the issuer borrows.
*The coupon (of a bond) is the interest that the issuer must pay.
maturityis the end of the bond, the date that the issuer must return the principal.
*The issue is another term for the bond itself.
indentureis the contract that states all of the terms of the bond.
People who invest in fixed-income securities are typically looking for a constant and secure return on their investment. For example, a retired person might like to receive a regular dependable payment to live on, but not consume principal. This person can buy a bond with their money, and use the coupon payment (the interest) as that regular dependable payment. When the bond matures or is refinanced, the person will have their money returned to them.
Interest rates change over time, based on a variety of factors, particularly rates set by the
Federal Reserve. For example, if a company wants to raise $1 million and not a lot of people in the market have free cash to lend, the company will have to offer a high rate of interest (coupon) to get people to buy their bond. If there are a lot of people in the market trying to get a return on their money, the company can offer a lower coupon.
To complicate matters further, fixed income securities are actually traded on the open market, just like stocks. To understand this, first realize that bonds are usually created in round face values, for example $100,000. If the current yield (interest rate) of newly issued similar bonds is 6% per year, and you are buying a bond with a coupon rate below 6%, then you can get the bond at a discount (below face value of $100,000), which brings your rate of return on that bond to 6%. Similarly, if the coupon rate of the bond you are buying is greater than 6% you will have to pay a premium for the bond to bring the rate of return down to 6%.
There are also index-linked, fixed-income securities. The most common and an example of the highest rated variety of this kind could include
Treasury Inflation Protected Securities(TIPS). This type of fixed income is adjusted to the Consumer Price Indexfor all urban consumers (CPI-U), and then a real yield is applied to the adjusted principal. This means that the US Treasury issues fixed income that is backed by the full faith and credit of the US government to outperform the CPI (e.g. to outperform the inflation rate). This allows investors of all sizes to not lose the purchasing power of their money due to inflation, which can be very uncertain at times. For example, assuming 3.88% inflation over the course of 1 year (just about the 56 year average inflation rate, through most of 2006), and a real yield of 2.61% (the fixed US Treasury real yield on October 19, 2006, for a 5 yr TIPS), the adjusted principal of the fixed income would rise from 100 to 103.88 and then the real yield would be applied to the adjusted principal, meaning 103.88 x 1.0261, which equals 106.5913; giving a total return of 6.5913%. TIPS moderately outperform conventional US Treasuries, which yield just 5.05% for a 1 yr bill on October 19, 2006. By investing in such fixed income, index linked fixed income securities, consumers can exceed the pace of inflation, and gain value in real terms.
All fixed income securities from any entity have risks including but not limited to:
* inflationary risk
* interest rate risk
* currency risk
* default risk
* repayment of principal risk
* reinvestment risk
* maturity risk
* streaming income payment risk
* duration risk
* convexity risk
* credit quality risk
* political risk
* tax adjustment risk
* market risk
* [http://www.ofterms.com/definition/fixed-income.php Fixed income explained in clear terms]
* [http://www.ejv.com/bp/html/glossary3.html Fixed Income Glossary]
Wikimedia Foundation. 2010.
Look at other dictionaries:
Fixed-income — – постоянный доход (фиксированный доход). Обычно эта фраза относится к так называемым инструментам с фиксированной доходностью: облигациям и депозитам, противоположностью которых являются инструменты с переменной доходностью (акции, фьючерсы и… … Финансовый словарь
fixed-income — UK US adjective [before noun] ► FINANCE used to describe investments such as bonds that pay the same amount of money every month, year, etc.: »Some experts predict that we might start to see a shift from shares to fixed income bonds … Financial and business terms
fixed income — n an amount of money that you receive to live on that does not change ▪ pensioners living on a fixed income … Dictionary of contemporary English
fixed income — noun count an income that does not change or get bigger over time: Senior citizens on fixed incomes have been hard hit by price rises … Usage of the words and phrases in modern English
fixed income — noun One which does not increase or decrease, such as income from a fixed interest investment • • • Main Entry: ↑fix … Useful english dictionary
fixed income — n. Regular income that does not fluctuate over time; income from a retirement benefit or annuity. See also price fixing The Essential Law Dictionary. Sphinx Publishing, An imprint of Sourcebooks, Inc. Amy Hackney Blackwell. 2008 … Law dictionary
fixed income — Bonds are regarded as fixed income investments. They obligate the borrower to pay the bond owner a fixed rate of interest during the term of the loan and to return the principal or face value when the loan matures, and a preferred shareholder… … Financial and business terms
Fixed Income — A type of investing or budgeting style for which real return rates or periodic income is received at regular intervals at reasonably predictable levels. Fixed income budgeters and investors are often one and the same typically retired individuals … Investment dictionary
fixed income — UK / US noun [countable] Word forms fixed income : singular fixed income plural fixed incomes an income that does not change or get bigger over time Senior citizens on fixed incomes have been hard hit by price rises … English dictionary
fixed-income — ˈ ̷ ̷| ̷ ̷(ˌ) ̷ ̷ adjective : having a uniform or relatively uniform annual income or yield bonds and preferred stocks are fixed income securities inflation has its hardest impact on such fixed income groups as people who have retired on social… … Useful english dictionary