An Introduction to Fixed-Income Securities

Fixed income securities offer a guaranteed periodic payment from the time they are purchased until maturity. For example, an investor could purchase a 5 percent fixed-rate bond from the New York State Treasury in the amount of $2,000. Each year, the investor would receive a 5 percent return, or $100, until the bond matured at a set point in the future. Then, the original $2,000 would be paid back. This type of instrument is very low-risk and offers consistent returns, but that does not mean it is an intrinsically valuable investment.

Risk of a Fixed-Income Security

On the whole, fixed-income securities are very low risk. This is particularly true when they are purchased from a government entity. State and federal governments have a very low record of default on bonds. In order for default to occur, the issuer would have to declare bankruptcy. Not only is the initial sum guaranteed to be returned in nearly every circumstance, but the interest payment is also guaranteed. The only thing that is not certain is the effect of inflation during the same period. If inflation happens to outpace the interest rate on this option, the investment will still lose money.

Reward of a Fixed-Income Security

Since a fixed-income security is incredibly low-risk, it is also relatively low-reward. The investor is simply, essentially, making a loan by purchasing a debt instrument from a private company or public municipality. The loan is paid back, and the investment is complete. No matter how much money the company or public entity earns off of the money provided by the investor, the investor's return will be consistent. For example, if you purchase a fixed-income security in the form of a state transportation bond, the state may earn tens of millions when the project is complete. You will earn back only your investment plus the fixed interest.

When to Purchase a Fixed-Income Security

Since these options are very low-reward, they are best for an individual who is simply looking to protect a capital investment and make a little bit of money on the side. A retiree is a good candidate to purchase fixed-income securities. On the same note, a young family looking to save for a college fund should be interested in this option. The parents could put the money away, keep it very protected and still earn a modest investment income while their child is young and needs day-to-day items.

Where to Purchase a Fixed-Income Security

Any broker, trader or investment manager can present you with options for a fixed-income security. Specify whether you are invested in private securities or public entity securities, such as government bonds. You will have a few options in terms of the dates of maturity. Most bonds and fixed-income instruments are presented in short-term and long-term options. Long-term options, held 10 years or more, often have higher interest rates to compensate an investor for locking up his or her money for a longer period. Short-term investments are more flexible, but they will generally have lower interest rates. 

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