A fixed income investment is an investment superseding equity arrangements, and which compels the issuing party to provide payment on a fixed schedule. An example: Should you lend money out with the contractual understanding that you are to receive interest payments on a definite schedule, then that would comprise the issuing of a fixed income security.
Issuing bonds and other types of fixed income security is a common practice for governments, both national and municipal, who wish to secure additional funding. Government-backed or supported agencies also make use of this tool. These “agency bonds” comprise a significant chunk of bonds issued over the course of a fiscal year.
In short, fixed income investments are (generally) non-appreciating assets that pay regular dividends to the investor and which usually entitle the investor to the assets of the company in which they have invested in the event of bankruptcy. This access to corporate assets exists as a preferred status, ahead of owners of common stock.
While lack of appreciation stymies potential for the kind of rapid growth one accepts the risks of common stock for, fixed income investing in bonds and related mediums can help to stabilize a portfolio and provide a steady, reliable. For investors in higher tax brackets, many municipal bonds are tax-free and should be considered.
A change in national interest rates causes bond prices to fluctuate accordingly. Bonds with a longer maturation period typically respond with greater violence to such fluctuations than bonds with relatively shorter maturation periods. Opportunity cost should also be considered, as a sub-ideal situation in which a bond similar to one’s own pays higher dividends may occur. The market should be carefully evaluated and all relevant data processed before purchasing bonds or other fixed income investments.
Credit risk, or the likelihood that a particular issuer will enter default on its payments due to lack of liquidity, comprises another significant stumbling block in the field of fixed income investing. In general a bond of lower quality with higher credit risk will offer larger dividends as an enticement factor to compensate for its own potential instability.
Beware of rising dividend yields, as it may signal approaching financial trouble for the company in question. Conversely, reliable bonds issue lower dividends but present attractive investment opportunities because of the unlikeliness of a major upset.
Above and beyond these risks, the international bond market presents its own unique hurdles to investors. Should the Yuan fall against the U.S. dollar, for example, U.S. investors owning bonds denominated in Yuans would face reduced returns. The reverse, of course, holds true as well. Ultimately fixed income investment opportunities present a normally stable but sometimes problematic market sector.
Lack of appreciation may discourage yield-focused investors, but those looking to diversify their portfolios with an eye toward reliability should consider fixed income investments like municipal, government, and corporate bonds as a great alternative to the exchange market.
The risks and rewards of fixed income investing make it a tenable field for now, and in the foreseeable future.