Fixed income

src: i.ytimg.com

Fixed income refers to any type of investment in which the borrower or issuer is required to make a fixed amount of payments on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year, and to pay back the principal amount at maturity. Securities with fixed income can be contrasted with equity securities - often referred to as stocks and shares - which do not create the obligation to pay dividends or other forms of income.

In order for a company to grow its business, it often has to raise money - for example, to finance the acquisition; to buy equipment or land; or invest in new product development. The terms under which investors will finance the company will depend on the company's risk profile. The company may deliver equity by issuing shares, or may pledge to pay regular interest and repay principal (bonds or bank loans). Fixed income securities are also traded differently from equities. While equities, such as ordinary shares, trading on the exchange or other established trading places, many fixed-income securities are freely sold principally.

The term "fixed" in "fixed income" refers to both the compulsory payment schedule and the amount. "Fixed income securities" can be distinguished from inflation index bonds, variable interest rate records, and the like. If a publisher passes a payment on the security of fixed income, the issuer fails, and depending on relevant laws and security structures, the payee may be able to force the issuer into bankruptcy. Conversely, if a company loses a quarterly dividend to a shareholder's (non-revenue share) share, there is no violation of the payment agreement, and no default.

The term fixed income is also applied to the income of a person who does not materially change from time to time. This may include income arising from fixed income investments such as bonds and selected shares or pensions that guarantee fixed income. When retirees or pensioners rely on their pensions as their dominant source of income, the term "fixed income" can also imply that they have relatively limited discretionary income or little financial freedom to make big or discretionary expenditures.

Video Fixed income

Jenis peminjam

The government issues government bonds in their own currency and state bonds in foreign currency. State and local governments issue local bonds to finance projects or other major expenditure initiatives. Debts incurred by government-backed agencies are referred to as bonds of agents. Companies can issue corporate bonds or earn money from banks through corporate loans. Preferred shares share some of the characteristics of fixed interest bonds. Securitized bank lending (for example, credit card debt, car loan or mortgage) can be structured into other types of fixed income products such as ABS-tradable ABS stockable assets such as corporate and government bonds.

Maps Fixed income

Terminology

Some of the terminology used in connection with this investment are:

• Publisher is an entity (company or government) that borrows money by issuing bonds, and will pay interest and repay the capital on time.
• The principal principal - also known as the maturity, nominal value, nominal value - is the amount borrowed by the issuer that must be returned to the lender.
• coupon (bond) is the annual interest to be paid by the issuer, expressed as a percentage of the principal.
• maturity is the end of the bond, the date on which the issuer should return the principal.
• The problem is another term for the bond itself.
• The indenture , in some cases, is a contract that states all bond terms.

src: i.ytimg.com

Investor

Investors in fixed income securities usually seek a constant and secure return on investment. For example, a retiree may want to receive a reliable, reliable payout to live like gratuities, but not to consume basic money. This person can buy bonds with their money, and use the coupon payment (interest) as a reliable payment routine. When a bond matures or is refinanced, the person will have their money back to them. The main investors in fixed income securities are institutional investors, such as pension funds, mutual funds, insurance companies and others.

src: www.pionline.com

Price factor

The main number used to assess the value of bonds is the result of dirty redemption. This is defined in such a way that if all future interest and principal payments are discounted back to date, at the same rate as the gross redemption proceeds (gross means pre-tax), the discounted value equals the current market price of the bonds (or the initial issuance price if the bond has just been launched). Fixed income investments such as bonds and loans are generally valued as credit spreads over low risk reference levels, such as LIBOR or US or German Government Bonds of the same duration. For example, if a 30-year US dollar mortgage has a redemption yield of 5% per annum and 30 years of US Government Bonds have a redemption yield of 3% per annum (referred to as risk free yield), credit spread is 2% per annum ( sometimes quoted as 200 basis points). Credit spread reflects the risk of default. Risk-free interest rates are determined by market forces and vary over time, based on various factors, such as current short-term interest rates, eg. the basic tariffs set by central banks such as the US Federal Reserve, British Bank in the UK, and Euro Zone ECB. If the bond coupon is lower than the yield, the price will be below par value, and vice versa.

In buying bonds, a person buys a series of cash flows, which are discounted according to the buyer's perception of how the interest and exchange rate will move throughout his life.

Supply and demand affect prices, especially in the case of market participants who are constrained in the investment they make. Insurance companies and pension funds usually have long-term liabilities they want to hedge, which requires low risk, predictable cash flows, such as long-term government bonds.

Some fixed-income securities, such as mortgage-backed securities, have unique characteristics, such as upfront payments, which have an impact on their prices.

src: www.vontobel.com

Inflation-related bonds

There are also inflation index bonds, fixed income securities linked to a specific price index. The most common examples are US Treasury Inflation Protected Securities (TIPS) and UK Index Linked Gilts. Interest and principal payments under this type of bond are adjusted to the Consumer Price Index (in the US this is CPI-U for urban consumers). This means that these bonds are guaranteed to outperform the inflation rate (unless (a) the market price has increased so the "real" result is negative, occurring in 2012 for many UK bonds, or (b) government or other issuer default on bonds). This allows investors of all types to maintain the purchasing power of their money even when inflation is high. For example, assuming inflation of 3.88% for 1 year (only about the average inflation rate of 56 years, through most of 2006), and a real yield of 2.61% (real US Treasury yield fixed on October 19, 2006, for 5 yr TIPS), the adjusted principal of fixed income will rise from 100 to 103.88 and then tangible results will be applied to the adjusted principal, which means 103.88 x 1.0261, which equals 106.5913; giving a total refund of 6.5913%. TIPS simply outperformed conventional US Treasuries, which earned only 5.05% for a 1-year bill on October 19, 2006.

src: www.thecsuite.co.uk

Derivatives

Fixed income derivatives include interest rate derivatives and credit derivatives. Often inflation derivatives are also included in this definition. There are various fixed income derivative products: options, swaps, futures contracts, and forward contracts. The most heavily trafficked types are:

• Credit default swap
• Swap rate
• Swap inflation
• Bonds futures on 2/10/30 years of government bond
• The interest rate on the 90-day interbank interest rate
• Advanced tariff agreement

src: image.slidesharecdn.com

Risk

Fixed income securities are subject to risks that may include but are not limited to the following, many of which are synonymous, mutually exclusive, or related:

• the risk of inflation - that the purchasing power of the principal and interest payments will decrease during the security period
• interest rate risk - that the overall interest rate will change from the available level when security is sold, causing opportunity costs
• currency risk - that the exchange rate with other currencies will change during the security period, causing loss of purchasing power in other countries
• default risk - that the publisher will not be able to pay scheduled interest payments or principal payments due to financial difficulties or vice versa
• the risk of reinvestment - that buyers will not be able to buy other similar return securities after the expiration of the current security
• liquidity risk - that the buyer will require the main fund for any other purpose with short notice, prior to the expiration of security, and can not redeem cash security within the required time period without any loss of fair value
• risk duration
• the risk of convexity
• credit quality risk
• political risks - that government action will cause the owner to lose the benefits of security
• tax adjustment risk
• market risk - the risk of market-wide changes that affect the security value
• event risk - the risk that externalities will cause the owner to lose the benefits of security

src: i.ytimg.com

See also

• Fixed income analysis

src: www.morganintl.com

References

src: www.closebrothers.com

External links

• British Debt Management Office
• Fixed Income

Source of the article : Wikipedia