What is Fixed Income?

Published by Thomas Herold in Corporate Finance, Investments, Retirement, Trading

'Fixed Income' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Fixed Income refers to the kind of budgeting and investing style that delivers periodic income and actual returns back to the owners of the investments. This income goes out in generally predictable amounts in frequent and anticipated intervals. The investors who flock to fixed income investments are usually retirees. They count on such periodic returns from investments to give them a stable and regular stream of income. Thanks to the dependable returns they provide, this type of investment is heavily preferred by the demographic of older investors.

Fixed income also defines a style of investing whose goal is to provide a general stream of stable and fixed income. Where individual lifestyles are concerned, it also relates to the income of a specific household or a particular individual. Mutual funds can be of this type of investing strategy. This portion of the funds will be invested in vehicles that provide low risk and which pay out interest or dividends. Bonds or mutual funds containing bonds are classic examples of these kinds of investments.

It is true that fixed income is most popular with retirees for a good reason. At this point in these investors’ lives, they need to count on both predictable and stable returns and regular income. It is the income sources such as investment returns, pensions, Social Security payouts, annuities, and other funds that generate the more or less same level of income retired individuals find necessary to sustain a given lifestyle from year to year. This is the reason that retirees are also a good explanation of the phrase fixed income. Their income is fixed, so they can not absorb additional costs and increases in living expenses.

Because the point of overall fixed income investment strategy is for guaranteeing a dependable stream of income, these investment fund advisors generally favor dividend yielding mutual funds, bonds, certificates of deposit, differing kinds of annuities, and money market funds.

Bonds still remain among the most common and popular of these fixed income investments today. Large corporations, local governments like municipalities and counties, state and provincial governments, and national governments all issue such bonds of different types. These investments provide a nice income for not only retirees but also other investors who are on the lookout for a diversified portfolio. The percentages of a portfolio dedicated to fixed income will vary depending on the individual investor’s needs and preference (or tolerance) for risk.

As an example, an investor could allocate a portfolio to the following fixed income categories. They might choose 50 percent to investment grade bonds, 20 percent to high yield bonds, 15 percent to Treasuries, and 15 percent to international bonds. Those products which are considered to be riskier, like longer maturity instruments and junk rated bonds, should always be a small percentage of the total portfolio in question. Naturally bonds which are riskier will pay a higher amount of interest or coupon rate since there is a greater chance of risk.

Besides bond yields, investors who are seeking income that is fixed have other choices for returns. There are interest paying investments like CDs and money market funds available.

Examples of concerns that affect fixed income instruments are important to consider. Borrowers can default on bonds, even those these are generally considered to be safe investments (though junk bonds are usually not). There are also exchange rate risks involved with international bonds. Longer maturity date fixed investments are also subject to a risk of interest rates going up over time, which could reduce the asset value of the underlying instrument. This is because where bonds are concerned interest rates and values are inversely correlated.

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The term 'Fixed Income' is included in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.