Examples of fixed income instruments
The main characteristics of fixed income are two: its low risk and its known return. A person who invests in fixed income securities knows that every certain period of time he will receive interest and that at maturity the capital will be returned. In other words, with fixed income we know in advance what amounts we will receive and at what time.
Fixed income investments can be short term, with maturities of less than 18 months, such as Treasury Bills or corporate Promissory Notes; or medium and long term, such as government or private company bonds and debentures. The former have great liquidity but little profitability, while the latter are less liquid but offer more succulent yields.
It is important to be clear that fixed income is not as safe as it may seem. All investment products involve risks, and this one is no exception. For example, there is always the risk that the entity issuing the securities may go bankrupt and not return the money to its investors. There is also the risk that the interest we receive will be below the official price of money and we will lose purchasing power as a result.
Fixed income and variable income examples
When it comes to investing, there are alternatives such as derivatives, fixed income and equities within the financial markets. The wide variety of vehicles and tools you can use to make your money profitable can confuse you and make you make wrong decisions, so here we will explain which are the best known financial instruments and their qualities.
Fixed income markets include investments such as government and corporate bonds, certificates of deposit, among others. Fixed income instruments can offer a steady stream of income with less risk than stocks.
Without a doubt, to understand what equities are, one must look at their best known financial instrument: stocks. These are securities that represent an ownership interest in a company. For investors, stocks are an equity product to increase their money and overcome inflation over time.
The main benefit of an equity investment in equity instruments is the possibility of increasing the value of capital in the form of capital gains or dividends. Equities can strengthen a portfolio’s asset allocation by adding diversification.
What is fixed income
Fixed income investment instruments are debt instruments issued by governments and corporations to a broad market. They are generally issued by governments and corporate entities with large financial capacity in defined amounts that carry an expiration date.
In exchange for lending their capital, investors receive interest from time to time. This interest can be paid implicitly with zero-coupon assets, or explicitly through coupons that are issued periodically in the case of bonds or debentures. The determination of the rate of return of this type of instruments is required to be calculated by means of mathematical and financial formulas that refer to the purchase of such instruments through a discount offered by the market.
Once the purchase of such instruments at a discount has been made, the instrument may be offered at a higher price. For the issuer of the securities it represents a cheaper source of financing than through banks, since intermediation is avoided and the risk is spread.
Fixed income products
In other words, agents who have money at their disposal can invest it and earn a return. At the same time, they make it possible for those agents who need financing to develop their growth plans to acquire it.
The cost of financing for one is the return for the other, after deducting all the commissions and fees of the intermediaries and the costs of all the machinery to set this mechanism in motion.
The intermediaries fulfill their function, the markets fulfill theirs and the assets are the instruments of exchange. They are documents (actually they are book entries, in most cases) that have economic rights attached to them. The return is the economic rights that the financial asset has (future income to its holder).
In this way, agents who need financing issue financial assets, those who have a surplus buy them, expecting a return for it. They can then be retransferred in a secondary market.