Fixed Income

Fixed income is a broad category of investments built around lending money in exchange for regular, scheduled interest payments. The most common example is a bond: a government, city, or company that needs cash issues a bond, and investors who buy it are effectively lending that entity money for a set period of time.

The mechanics are straightforward. The issuer promises to pay a stated interest rate, called the coupon, usually every six or twelve months, and then repay the original loan amount, called the principal or face value, when the bond matures on a specific date. Because the payment schedule and amounts are spelled out in advance, the income stream is "fixed" — this is where the name comes from, and it is also what separates fixed income from stocks, where dividends and price gains are never guaranteed.

The nuance beginners miss is that "fixed" refers to the payment structure, not to safety or to price stability. A bond's own market price still moves up and down before maturity, mainly in response to changes in prevailing interest rates: when rates rise, existing bonds with lower fixed coupons become less attractive and their prices tend to fall, and vice versa when rates fall. There is also credit risk — the issuer could fail to pay — which is why bonds from different issuers carry different yields depending on how likely they are to default.

Fixed income covers more than plain government or corporate bonds; it also includes instruments like municipal bonds, treasury bills, certificates of deposit, and mortgage-backed securities, all of which share the same basic idea of a scheduled return on a loan rather than ownership in a company.