Define: Fixed Income

Fixed income refers to an investment that provides a fixed return over a specific period of time, such as bonds or certificates of deposit (CDs). It is a type of investment that offers regular interest payments to the investor.

Fixed income investments provide a fixed return, usually in the form of interest payments, while equities represent ownership in a company and offer potential returns through dividends and capital appreciation.

Fixed income investments are generally considered safer than equities because they offer a fixed return and are backed by the issuer’s ability to make interest payments. However, the level of risk can vary depending on the issuer’s creditworthiness.

Common types of fixed income investments include government bonds, corporate bonds, municipal bonds, treasury bills, and CDs. Each type has its own characteristics and risk profile.

The tax treatment of fixed income investments can vary depending on the type of investment and the investor’s tax bracket. Interest income from fixed income investments is generally taxable at the federal, state, and local levels.

While fixed income investments are generally considered less volatile than equities, they can still lose value if interest rates rise or if the issuer’s creditworthiness deteriorates. However, the extent of potential losses is typically lower compared to equities.

Credit rating agencies, such as Moody’s and Standard & Poor’s, provide ratings that assess the creditworthiness of fixed income investments. These ratings can help investors evaluate the risk associated with a particular investment.

A bond trustee acts as a neutral third party that represents the interests of bondholders. They ensure that the issuer complies with the terms of the bond agreement and facilitate the payment of interest and principal to bondholders.

Fixed income investments can be bought and sold in the secondary market before they mature. However, the price at which you can sell may be influenced by factors such as prevailing interest rates and the issuer’s creditworthiness.

To diversify a fixed income portfolio, investors can consider investing in different types of fixed income securities, such as government bonds, corporate bonds, and municipal bonds. They can also diversify by investing in bonds with different maturities and credit ratings.