A fixed-income security is an investment that provides a return in the form of fixed periodic interest payments and the eventual return of principal at maturity. Unlike variable-income securities, where payments change based on some underlying measure—such as short-term interest rates—the payments of a fixed-income security are known in advance.
Fixed-Income securities are debt instruments that pay a fixed amount of interest—in the form of coupon payments—to investors. The interest payments are typically made semiannually while the principal invested returns to the investor at maturity. Bonds are the most common form of fixed-income securities. Companies raise capital by issuing fixed-income products to investors.
Fixed-income securities provide steady interest income to investors throughout the life of the bond. Fixed-income securities can also reduce the overall risk in an investment portfolio and protect against volatility or wild fluctuations in the market. Equities are traditionally more volatile than bonds meaning their price movements can lead to bigger capital gains but also larger losses. As a result, many investors allocate a portion of their portfolios to bonds to reduce the risk of volatility that comes from stocks.
It's important to note that the prices of bonds and fixed income securities can increase and decrease as well. Although the interest payments of fixed-income securities are steady, their prices are not guaranteed to remain stable throughout the life of the bonds.
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