Fixed income
What is Fixed income?
Fixed income is the asset class of contractual debt claims and related instruments whose cash flows depend on interest rates, credit, inflation, currency, and embedded options. The name describes the legal and cash-flow structure, not a promise that market price, purchasing power, payment amount, or realized investor return will remain fixed. Contract terms always take precedence over the category label.
What fixed income includes
The class includes government, agency, municipal, corporate, securitized, inflation-linked, floating-rate, and private debt. Instruments range from short bills to perpetual securities and can carry calls, puts, conversion, subordination, or contingent loss absorption. Fixed income does not mean its market value or realized return is fixed, and some securities have variable or no periodic coupons.
Sources of return
Return can come from coupon income, reinvestment, movement toward principal repayment, changes in government yields and credit spreads, currency, and security selection. Expected return must account for default and recovery, calls, transaction costs, and taxes. Duration describes rate sensitivity, while spread duration and scenario analysis help locate other sources of price risk.
Example
A five-year bond pays a 4% coupon but trades below par because comparable yields rose. An investor may receive coupons and a gain toward par if the issuer pays through maturity. Realized return can still differ from yield to maturity when the bond defaults, is called, is sold early, or coupons are reinvested at another rate.
Portfolio role and interpretation
High-quality bonds can provide income, liquidity, liability matching, and diversification from growth-sensitive assets, though these properties vary by regime and maturity. Long-duration government debt may rally in a disinflationary recession and fall sharply during inflation. High-yield debt can behave more like equity during stress. Analyze exposures by issuer, currency, curve, duration, credit, seniority, sector, and liquidity.
Risks and practical checklist
Fixed income faces interest-rate, curve, inflation, credit, spread, liquidity, reinvestment, call, prepayment, and currency risk. Map every contractual cash flow, option, covenant, and priority. Compare yield with a matched reference curve and expected loss. Reconcile clean and dirty prices, accrued interest, and settlement conventions. Stress parallel and nonparallel rate moves, spread widening, defaults, currency changes, and forced-sale conditions.
Also known as: fixed-interest investments, debt securities
Sources and further reading
- Bonds: Frequently Asked Questions, Investor.gov, U.S. Securities and Exchange Commission
- Capital Market Expectations, Part II: Forecasting Asset Class Returns, CFA Institute