Fixed-Income Security

Fixed-Income Security Key takeaways
* Fixed-income securities pay predictable interest (coupons) and return principal at maturity.
* Common types include government debt (T-bills, notes, bonds), municipal bonds, corporate bonds, CDs, savings bonds, and preferred stock.
* Risks include interest-rate risk, inflation risk, credit/default risk, and liquidity risk.
* Fixed income is useful for portfolio diversification and stable income; tax treatment varies by instrument.
What is a fixed-income security? A fixed-income security is a debt instrument issued by a government, municipality, or corporation that pays periodic interest and returns the principal at a specified maturity date. Investors effectively lend money to the issuer in exchange for scheduled income and repayment. Compared with equities, fixed-income investments generally offer lower volatility and more predictable cash flow. How fixed income works
* You buy the issuer’s debt instrument and receive periodic interest payments (often semiannual).
* At maturity, the issuer repays the principal (face value).
* Some instruments (e.g., T‑bills, zero‑coupon bonds) are issued at a discount and pay no periodic coupons; you receive face value at maturity.
* Returns and risk vary by issuer credit quality, term (maturity), and market interest rates.
Common types of fixed-income securities
* Government debt
* Treasury bills (T‑bills): Short-term (4–52 weeks), issued at a discount, considered very low risk.
* Treasury notes (T‑notes): Intermediate-term (2–10 years), pay semiannual interest.
* Treasury bonds (T‑bonds): Long-term (20–30 years), pay semiannual interest; interest is exempt from state and local taxes.
* Treasury Inflation-Protected Securities (TIPS): Principal adjusts with inflation to protect purchasing power.
* Municipal bonds (munis)
* Issued by state or local governments to fund public projects. Interest is often exempt from federal income tax and may be exempt from state/local tax for residents of the issuing jurisdiction.
* Corporate bonds
* Issued by companies for capital needs. Range from investment-grade (lower default risk) to high-yield/junk (higher default risk, higher yields).
* Certificates of Deposit (CDs)
* Bank or credit-union deposits with fixed term and interest rate; typically insured by the FDIC or NCUA up to limits.
* U.S. savings bonds
* Government savings instruments that earn interest over long terms (up to 30 years); interest is exempt from state and local taxes.
* Preferred stock
* Hybrid security that pays fixed dividends but represents equity rather than debt; dividends can be suspended and there is typically no maturity.
Credit ratings and default risk Independent agencies (Moody’s, S&P, Fitch) rate issuers and issues to indicate default risk:
Investment-grade: BBB−/Baa3 and above — lower default risk.
Speculative-grade (high-yield/junk): BB+/Ba1 and below — higher default risk, higher potential returns.
Government-backed U.S. Treasuries are generally treated as the safest credit exposure. Explore More Resources

Advantages
* Predictable income stream and scheduled return of principal.
* Lower volatility than equities, helping stabilize portfolios.
* Useful for diversification and income-oriented goals (retirement, cash flow).
* Certain instruments offer tax benefits (e.g., municipal bonds, Treasury interest exempt from state/local taxes).
Disadvantages and risks
* Lower long-term returns than many equities.
* Interest-rate risk: bond prices fall when market interest rates rise.
* Inflation risk: fixed payments can lose purchasing power over time.
* Credit/default risk: issuer may miss payments or default.
* Liquidity risk: some bonds can be hard to sell without price concessions.
* Reinvestment risk: coupons or matured principal may have to be reinvested at lower rates.
Bond funds vs. individual bonds
* Individual bonds
* Provide a known principal repayment at maturity if held to term.
* Require more capital to build diversification across issuers and maturities.
* No ongoing management fees.
* Bond funds (mutual funds/ETFs)
* Offer instant diversification and liquidity.
* Net asset value fluctuates with market interest rates; principal is not returned at a specific maturity.
* Charge management fees and may have taxable distributions.
Choose based on goals: individual bonds for predictable returns and defined maturity; bond funds for convenience, diversification, and liquidity. Role in a portfolio Fixed income can:
Reduce overall portfolio volatility.
Provide steady income and capital preservation for conservative investors or near-term goals.
* Act as a counterbalance to equity risk, though allocation should reflect your risk tolerance, time horizon, and income needs. Explore More Resources

Tax considerations Tax treatment varies:
Municipal bond interest is often federal tax‑exempt and may be state‑exempt for local residents.
U.S. Treasury interest is subject to federal tax but exempt from state and local taxes.
* CDs and most corporate bond interest are taxable at the federal, state, and local levels.
Check specific instrument rules and consult a tax advisor for individual circumstances. Conclusion Fixed-income securities are instruments for lending capital in exchange for scheduled income and principal repayment. They offer stability, diversification, and predictable cash flow, but come with trade-offs including lower returns and exposure to interest-rate, inflation, and credit risks. Selecting the right mix of individual bonds, bond funds, and specific fixed-income types depends on your investment goals, time horizon, and tax situation; consider professional advice when building a fixed-income strategy. Explore More Resources