When it comes to investing, fixed-income securities are an essential part of any portfolio, especially for those seeking a steady, reliable income stream. Yet, despite being one of the most known investment options, most investors do not understand the opportunities and risks of fixed-income securities, the choices available and how to analyze them. In this guide, I'll discuss the fundamentals of fixed-income securities, describe the different types of bonds and how they differ in risk and return.

What are fixed-income securities?

A bond is a load an investor provides to either a governmental entity or corporation that promises to pay back the loan with interest over a specified period of time. They are called ‘fixed income securities’ as they offer the investors fixed, regular payments that, when held to maturity, shield the investors from market fluctuations. In simple terms, an investor lends money to the issuer of the bond, who agrees to pay the investor interest on the loan amount, at fixed time intervals, over the bond’s lifespan. Holding a bond to maturity guarantees a fixed cashflow at maturity and is independent of market flucuations.

Types of fixed-income securities

There are numerous types of fixed-income securities available for investment. The most common types include government bonds, municipal bonds, corporate bonds and mortgage-backed securities that differ in credit worthiness and the way interest and principal payments are determined. For example US Government bonds provide a reliable and very secure source of income with virtually no risk of default. Municipal bonds are similar to government bonds, except they are issued by local municipalities, cities and states, and in many cases are free of federal income tax. On the other hand, corporate bonds are issued by companies looking to raise capital. They are riskier than government bonds and can have fixed or floating interest rates.

Here are five different types of fixed-income securities:

(1) US Treasury bonds: These are debt securities issued by the US government that offer a stable return with minimal risk.

(2) Corporate bonds: These debt securities issued by corporations to raise capital, providing investors with a fixed or variable interest rate and can have early redemption dates, refered to as "Calls" and also can have a convertible feature allowing the investor to convert the bond into the company's stock.

(3) Municipal bonds: These bonds are issued by local municipalities and offer federal tax-free income, making them a popular choice for investors seeking to minimze income taxes.

(4) Certificates of Deposit (CDs): CDs are offered by banks or credit unions and earn interest over time, where the initial investment together with interest is paid upon maturity.

(5) Preferred stocks: These are stocks that pay a fixed dividend and have priority over common stocks, making them slightly more credit worthy and bonds of the same ccompany.

Factors to consider when investing in fixed-income securities

Here are some factors to keep in mind before investing in bonds:

(a) Interest rates and inflation: Fixed-income securities are sensitive to interest rates and inflation, and these changes have a significant impact upon the rate of returns received.

(b) Creditworthiness: The issuer's creditworthiness is essential, and investors should research and analyze the company’s financial health before investing.

(c) Maturity and duration: The maturity and duration of the bond are critical factors in determining the return on investment and risk. Investors should use standard fixed-income analytics to weigh the pros and cons of investing in bonds of different maturity, interest rate and credit-worhtiness.

Trust the Industry Experts When Considering Fixed-Income Securities

Fixed-income securities offer investors an excellent opportunity to diversify their portfolios and create a reliable and steady income stream. Understanding the different types and examples of fixed-income securities is critical before making investment decisions. By considering the issuers risk factors, maturity, and interest rate features investors can make informed decisions that will meet their investment goals and provide stable returns over the long term.

When you are ready to explore investing in fixed-income securities, contact the experts at DataVerse Systems. At DataVerse Systems, we have over 25 years of experience building fixed-income analytic systems, trading systems, portfolio management and accounting systems for major investment firms. Request your demo appointment today.