Difference between revisions of "Fixed income"

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==Background==
 
==Background==
  
Fixed-income investments are typically viewed as less risky than stocks but because their value is tied to interest rates they offer higher returns than cash. Most also offer a predictable income stream as well as appreciated value over the life of the security, while many others ofer tax advantages.
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Fixed-income investments are typically viewed as less risky than stocks but offering higher returns than cash. Most also offer a predictable income stream as well as appreciated value over the life of the security, while many others offer tax advantages.
  
 
==Advantages==
 
==Advantages==

Revision as of 16:30, 7 April 2008

Fixed income (FI) securities pay investors a set amount of interest at a specified time. Most are bonds issued by either governments or corporations but they can also be bond funds or even bank certificates of deposit (CDs).

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Background

Fixed-income investments are typically viewed as less risky than stocks but offering higher returns than cash. Most also offer a predictable income stream as well as appreciated value over the life of the security, while many others offer tax advantages.

Advantages

Most investors hold some of their portfolio in fixed-income securities, and the more conservative the investor the more they tend to hold. That's because FI investments act as a hedge against exposure to equities and other higher growth securities.

Consequently, investors tend to rebalance their portfolios towards FI as they grow older, both to protect its value and to generate a stable income. Other investors looking to reduce their tax burden often use tax-favored FI securities like munis and treasuries

Disadvantages

Fixed-income securities are considered a safe and conservative investment but generally offer much less growth potential than stocks. And although less volatile than equities, the bond market is at the mercy of interest rates and can be volatile.

Plus some seemiongly secure fixed-income securities can still be hammered by a falling market. The market for mortgage-backed fixed-income securities like CDOs, for example, have recently all but disappeared as liquidity dried up following the subprime mortgage meltdown.