Bonds

What is fixed income?

Fixed income is a relatively know financial instrument in the bond market, where bondholders receive fix payments from the issuers on an annual, semi-annual or quarterly frequency. It’s a type of investment where investors perceive as more conservative than other financial assets like equities, commodities, or derivatives. Thus, investors often consider fixed income securities as a good way to diversify and reduce risk of a portfolio.

Who issued bond (fixed income security)?

In the present financial markets, there are primarily two ways for borrowers to finance their business operations. And it is through either equity or debt where borrowers raise money from investors. Equities are commonly known as fractional ownership of a company. They are called shares, and investors who purchase these shares are often rewarded through capital appreciation, meaning the increase in the price of the shares purchased. Price movements of shares are uncertain, so they are often considered a risky instrument. Even though company raises money from common investors, the company are not obligated to refund the money being borrowed.

Debt, on the other hand, does not represent fractional ownership of the company, debt acts as loans like normal bank loans. Borrowers like companies or government raise capital by issuing debt instruments that promise fixed interest payments to bondholders. In the case of default, where the company undergoes bankruptcy, bank will receive its first payment, then bondholders, and whatever remained is left to equity investors.

Type of bonds

The U.S Treasuries, which represent the government, accounts for a large portion of the bond market. Common debt instruments issued by the government include Treasury Bills (T-Bills), Treasury Notes (T-notes), and Treasury Bonds (T-bonds). The difference between these three Ts is their time to maturity. T-bills have the lowest time to maturity; T bonds have the medium time to maturity and T-bonds have the longest time to maturity.