Fixed Income

A fixed income instrument, often referred to as a fixed-income security or bond, is a financial instrument that represents a loan made by an investor to a borrower, typically a corporation or government entity. In return for the loan, the issuer of the fixed income instrument agrees to pay periodic interest payments (i.e. the coupon) to the investor and return the principal amount at the instrument's maturity date. The term "fixed income" arises from the predictability of these interest payments, which are typically paid at a fixed rate and schedule, making them a relatively stable investment option.

Types of fixed income instruments

  • Government Bonds: Issued by national governments, often considered the safest due to government backing.
  • Corporate Bonds: Issued by companies, varying in risk based on issuer's creditworthiness.

There are many other types of instruments that offer a diverse range of investment options, allowing investors to customize portfolios based on risk tolerance and income needs. In the near future, we will expand our offering to include municipal bonds and certificates of deposit (CD). Municipal bonds are issued by local government entities and are used to finance public projects. A CD is a time deposit offered by banks and financial institutions where you invest a fixed sum of money for a specified period at a predetermined interest rate.

Basic attributes of a fixed income instrument

  • Issuer: The entity (government, corporation, etc.) that issues the bond.
  • Coupon Rate: The fixed or floating interest rate paid to the investor.
  • Maturity Date: The date when the principal amount is repaid to the bondholder.
  • Principal Amount: The face value of the initial investment.
  • Credit Risk Rating: The risk of the issuer defaulting on interest or principal payments.

Buying a fixed income instrument

Fixed income instruments trade on the Over-the-Counter (OTC) Market on most business days from 8:00 AM to 5:00 PM ET. They are traded directly between buyers and sellers, often facilitated by broker-dealers on the OTC market. The OTC market is decentralized, and trades can occur electronically or over the phone. During this time, orders are accepted to buy and sell at a price specified by the customer. The price of every instrument updates every few milliseconds to represent the last trades that took place.

Owning a fixed income instrument

Owners of fixed income instruments are entitled to receive certain compensation and adjustments as determined by the issuer. These adjustments occur automatically and can include scenarios like:

  • Receiving cash as a coupon payment
  • Receiving the face value of the bond at the end of the bond’s term i.e. maturity

Other events are not mandatory and allow each shareholder to participate only if he or she chooses. These are often referred to as “voluntary actions” and include:

  • Issuer partially redeeming the bonds before maturity date
  • Agreeing to accept an issuer’s offer for one’s bonds (a “tender offer”)

To learn more about voluntary actions and corporate actions, take some time to review the corporate action section of our guides.