Fixed-income security is a security that offers a return with fixed periodic interest payments. The principal of the security will also be returned in the end at maturity. Therefore, fixed-income securities are mostly suitable for risk-averse investors.
As the payments are fixed without much change, investors can know exactly how much income he or she will earn from the security. Because of such certainty, fixed-income securities often have a lower rate of return than variable-income securities.
The payment of the security can be in the form of a coupon payment, a dividend on preferred stock, or an interest payment. Typically, the interest payments of fixed-income securities will be paid semiannually.
Fixed-income securities have various types, and treasury bonds are the most common form. Other common forms of fixed-income securities include preferred shares, certificates of deposits (CDs), and money markets.
The pros and cons of fixed-income securities
First of all, fixed-income securities can offer investors stable interest income throughout the life of the security. Besides, the securities are rated by professional credit rating institutions that enable investors to select bonds from issuers who are financially stable.
Even though stock prices can fluctuate greatly from time to time, fixed-income securities tend to have less risk of price volatility. In addition, some forms of fixed-income securities like U.S. Treasuries are guaranteed by the government. This means investors will obtain a much safer return.
However, sometimes the issuer will default on repaying the principal or interest payments. This can cause credit risk. Also, compared with other kinds of investments, fixed-income securities offer a lower rate of return. If interest rates in the overall market rise faster than the rate on fixed-income securities, investors may lose out. Besides, the return on fixed-income securities is likely to be impacted by inflation.