Difference between revisions of "Fixed income"

From MarketsWiki
Jump to: navigation, search
Line 27: Line 27:
  
 
[[Category: definitions]]
 
[[Category: definitions]]
[[Category: bonds]]
+
[[Category: financial instruments]]

Revision as of 12:18, 11 December 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).

Template:TradeLink Ad 1

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 value and to generate a stable income[1] . Other investors looking to reduce their tax burden often add tax-favored FI securities like munis and treasuries to their portfolios.

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 unpredictable[2].

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

References

  1. Fixed Income Investments. Edward Jones.
  2. Risks of Fixed Income. Fidelity.