What is Fixed Income?

//What is Fixed Income?
What is Fixed Income? 2017-10-04T21:09:48+00:00

Definition: Fixed income is a regular and steady stream of income from an investment security that establishes a loan from the investor to the issuer that must be repaid on a set schedule with an unchanging payment amount.

What Does Fixed Income Mean?

What is the definition of fixed income? Many retired people prefer this steady stream of earnings because it’s a reliable and predictable form or income. They simply invest their savings in bonds and other securities and get a check each period for the earnings. The biggest shortfall of fixed-income investing, however, is that the payments are not adjusted for inflation. Thus over time, inflation can eat into the spending power of the earnings. This is commonplace in many pensions that pay out the same payments to recipients for the rest of their lives.

For instance, let’s assume an individual’s pension invested in a 30-year bond paying $500 per month, they would receive the same $500 interest payments for 30 years. Obviously, $500 today is worth way more than $500 in 30 years. Thus, when someone is living on a fixed income, they must understand this concept and invest accordingly.

Businesses with a very high level of trustworthiness and establishment may issue bonds for the purposes of raising capital for a given venture or expansion effort. Often businesses of this caliber do not have too much problem issuing bonds because their reputation assures potential investors that they will receive at least the full principal amount of their bonds back. With low risk of dissolution or absolution, large companies enjoy a large amount of freedom in dispensing such bonds if they are deemed to be necessary.

Another perk for those that purchase bonds is that bond-holders are considered to be creditors so they receive priority in payment over the stakeholders if a company is sold or files for bankruptcy. The fixed income nature of the bonds are favorable for businesses, because they are a ‘safer’ way of lending, assuming that the currency does not greatly increase in value before the security has matured. In addition, if interest rates are particularly low then a fixed-income security such as a bond may be the best arrangement for a particular business.

Example

Jimmy owns a very large asset-management company that has been in existence for nearly a century. The company has enjoyed a consistently positive reputation in the business community and has grown to be one of the largest asset-management organizations in the United States. Jimmy wants to expand the organization to other territories, but he is limited by his capital. While seeking investments, he notices that the interest rates in the United States are at historically low rates. This means that Jimmy’s company would receive the greatest deal and best utility from a fixed-income loan, so Jimmy sells a 10-year $200,000 bond to investors.

Irene is a retired schoolteacher who wants a stable investment that she can expect steady returns, so she purchases Jimmy’s bond. As such, she receives $800 per month for 10 years as bond interest payments. After the 10 year bond has matured, she receives the $200,000 principal back as well.

Summary Definition

Define Fixed Income Securities: Fixed income means the earnings from a bond or money market security that stick to a set payment schedule and don’t vary in amount.