What is Fixed Income Securities?

FIXED INCOME SECURITIES:

Fixed-income securities are financial claims with promised cash flows of known fixed amount paid at fixed dates. It is a form of debt. These are investment where the cash flows are according to a predetermined amount of interest.

BENEFITS OF FIXED INCOME SECURITIES:

The benefits of holding FIXED INCOME SECURITIES as a part of a balanced portfolio that are timeless. Fixed income securities can provide following key benefits to investment portfolios:

1. Capital stability- Fixed income securities are an important source of capital stability issued by investment grade entities such as sovereign governments, corporations & financial institutions.

2. Fixed income source- Coupon income drives the majority of returns on fixed income assets, & also provides an additional buffer to declines in capital values should interest rates rise.

3. Liquidity- Secondary markets exist for fixed income securities, & provide the ability for investors to readily liquidate or re-balance their portfolios should the need arise.

4. Low risk- In fixed income returns bear relatively low correlation to returns from typically riskier asset classes. Therefore there are significant portfolio diversification benefits from the reduction of portfolio return variability by including fixed income in a portfolio alongside other asset classes.

5. Long term returns- Fixed income tends to provide better longer term outcomes compared with cash as an investment asset class because the interest rate risk characteristics of bonds provide on average higher yields as compensation for higher return variability.

6. Managing Portfolio risk- An allocation to fixed income assets can play a vital role in managing total portfolio risk for a balanced portfolio. By including a fixed income allocation in a balanced portfolio, these features also provide portfolio efficiency gains from reducing the variability of returns below the levels of the weighted average of the combined asset classes.

TYPES OF FIXED INCOME SECURITIES:

The types of Fixed Income securities are based on their insurance, i.e.by the government,banks or financial institutions or by the corporate sector.The different types of fixed income securities include government securities, corporate bonds, Treasury Bills, Commercial Paper, Strips etc…

1. Bonds: A bond is an obligation or loan made by an investor to an issuer (e.g. a government or a company).

2. Treasury Bills: Treasury bills (T-bills) are the safest type of short-term debt instrument issued by a government.Ideal for investors seeking a 1- to 12- month investment period,T-bills are highly liquid and very secure.

3. Banker’s Acceptances: Banker’s Acceptances (BAs) are short term promissory notes issued by a corporation,bearing the unconditional guarantee (acceptance) of a major Chartered Bank.

4. Mortgage-Backed Securities (MBS): MBS is an investment that combines the features of residential mortgages.

5. Strips Coupon and Residuals: Strips coupons and residuals are instruments purchased at a discount that mature at par (100).They grow over time and while any interest income is not payable until maturity, a nominal amount of interest is accrued each year and must be claimed as income by the purchaser for tax purposes.

6. Commercial Paper: Commercial Paper refers to unsecured promissory notes issued by large corporations;the notes are not backed by any collateral but they rely on the high credit rating of the issuing corporation.

Fixed Income securities are good option for people who likes low risk investment.

HAPPY INVESTING.