Fixed-income are those securities that pay a fixed interest until maturity and at the maturity the investor gets back the amount invested called principal. The most common fixed-income securities are the Government and Corporate bonds.

Fixed-Income Explained

The interests are generally paid annually or semi-annually. As with other type of investments, the higher the risk, the higher the expected profit. For fixed-income there are different rating agencies like S&P Global Ratings or Moody’s that value the risk of the securities. The riskier they are, the higher the interest rate they will have as investors will want a higher return for the risk they assume.

Fixed-income securities are mostly impacted by central bank monetary policy and inflation. If you hold a bond with a 3% interest rate and the interest rate in the market rises, then you lose on that foregone higher interest rate. If inflation rises above the interest rate you get paid, then you lose on your real income.

So, if you get a 3% interest and inflation is at 4%, that means that your real return is -1%. Governments and Companies issue bonds to raise capital for various projects. When the issuer of the bond cannot pay the interest or the face value at maturity, it’s said to be in default.