Fixed income
What is it?
Refers to a class of financial assets that generate predetermined periodic payments, such as interest, dividends, or coupons. Fixed income securities include bonds, promissory notes, and other debt instruments issued by governments, corporations, or other entities. Unlike stocks, which do not guarantee a specific payment, fixed income instruments offer a fixed or variable return depending on market conditions and the terms established at the time of issuance.
The main characteristic of fixed income is the predictability of payments, making it an attractive option for investors seeking stable income and lower risk compared to other asset classes. Bonds, for example, pay interest periodically and return the principal value of the instrument at maturity, unless the issuer defaults.
Key aspects to consider
Fixed income is generally considered a lower-risk investment compared to stocks, as interest payments and the return of principal are predetermined, provided the issuer does not default. However, it is important to assess the credit quality of the issuer, as bonds issued by companies or governments with lower creditworthiness may offer higher interest rates to compensate for the additional risk.
Interest rates also play a crucial role in the profitability of fixed income. If interest rates rise, the prices of existing bonds tend to fall, which can affect the value of fixed income assets in the secondary market. On the other hand, in a low-interest-rate environment, bonds may offer lower yields, leading some investors to seek higher-yielding alternatives.
Additionally, investors should consider the duration of fixed income instruments, as longer durations may involve greater interest rate risk, while shorter-term bonds are generally less sensitive to these changes.