Tuesday, January 15, 2013

Fixed Earnings Buying and selling Described

Fixed income often is part of a investment portfolio. The term is rarely used outside investment circles, however, and there are a large number of asset categories that fall under the fixed income umbrella. Most of these assets follow similar rules, and they all have one thing in common: debt.


"Fixed income" is the broad term for a number of different types of securities, including corporate bonds, municipal bonds, savings bonds, U.S. government agency bonds and certificates of deposit. Fixed income assets also are known as debt securities, and they are issued by a company or other entity to raise cash and finance business operations. When you purchase a fixed income security, you loan money to a bank, government entity or corporation--the issuer--for a period of time. In return, the issuer pays you interest on a set schedule.


Fixed income securities trade "over the counter," meaning they usually are not available on the New York Stock Exchange or similar markets. Fixed income investors typically buy and hold, so the volume of trading is much lower than it is for stocks. Over-the-counter (OTC) platforms are designed to bring issuers, buyers and sellers together in an environment designed for these lower volume trades. You can purchase bonds on the primary market, directly from the issuer when they are released, or on the secondary market from someone who no longer wants to hold the bond.


Fixed income assets are structured based on interest rate, coupon and maturity date. Interest may be at a fixed rate or it may vary based on a set calculation. The payment schedule typically is known as the "coupon," which refers to early pencil-and-paper days when paper bonds literally had tear-off coupons that could be exchanged for the bond interest. Interest payments usually are monthly, quarterly or at maturity. Fixed income assets mature at some point in the future. Maturity periods range from a few weeks for bank CDs to decades for bonds and agencies. When the asset matures, the holder receives a final interest payment along with a return of the full value of the initial investment, also known as the principal. Fixed income assets that do not pay interest until maturity are called "zero coupon." Some assets may be "callable," meaning that the issuer can pay back the principal early and will not owe any additional interest.

Trading Risks

Fixed income assets generally are considered less risky than stocks, because their prices do not fluctuate as much. However, there are a number of risks to consider when trading fixed income assets. Interest rates fluctuate. If interest rates go up, your lower rate bond becomes difficult to sell, because there will be other, higher-paying options available. This means you cannot access your principal for better paying investments. If interest rates go down, your bond may be called, and you can lose a valuable source of income. All fixed income assets are loans and are based on the stability of the issuer. If a company goes under, it may not be able to pay back the full value of your principal.

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