What Is Fixed Income?
Fixed income refers to investments that promise a defined stream of payments, typically periodic interest plus repayment of principal at a stated maturity. The category includes government bonds, corporate bonds, municipal bonds, Treasury bills, and structured products like mortgage-backed securities.
The name comes from the fact that the payment schedule is fixed by contract at issuance. That contrasts with equities, where dividends are discretionary and returns depend entirely on how the business performs.
How It Works
Fixed income returns come from two sources: the coupon income the investor collects and any change in the security's market price. Prices fluctuate mainly with interest rates and credit quality, and the sensitivity of a bond's price to rate moves is measured by its duration.
The fixed income universe spans a risk spectrum. Short-term government debt like Treasury bills sits at the safest end, investment grade corporate bonds in the middle, and high yield, or junk, bonds and distressed debt at the riskier end, where credit analysis becomes critical.
Example
Suppose you build a simple fixed income portfolio by investing $10,000 in a bond fund with an average yield of 5%. You can expect roughly $500 of income per year while you hold it. If interest rates rise by one percentage point and the fund's duration is 6 years, the fund's price would fall by approximately 6%, temporarily offsetting more than a year of income.
That example shows why fixed income is steady but not risk-free: income is contractual, but market value still moves with rates.
Why It Matters
Fixed income markets are where governments fund deficits and companies finance operations, and they are far larger than global equity markets. Yields on government bonds also serve as the benchmark risk-free rates used to price nearly every other asset, from stocks to real estate.
Careers-wise, fixed income is one of the biggest divisions on Wall Street, spanning rates and credit trading, debt capital markets, and credit research.
