Fixed Income Market

What is a Fixed Income Market?

Fixed Income Market is a Market where fixed income securities like government bonds, corporate bonds and treasury bills are traded. In his market the investors receive regular income whether it is on a monthly, quarterly, half-yearly or yearly basis as well as repayment of principle amount on maturity.

Types of Fixed Income Securities in Fixed Income Market

Different types of fixed income securities are traded in the fixed income market.

#1 – Bonds

Bonds are issued by the corporate and government to finance the business or expansion of a business. If an investor invests in bond, then they will get fixed incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments.read more on a regular basis, which is called coupon payment, and will get the principal amount on the maturity of a bond.

#2 – Treasury Bills

It is also fixed-income security, which is issued by the federal government. This security is issued with a maturity period of one to twelve months. This security does not offer any Interest or Coupon or a regular basis but offers a discount at the time of the Issue.

Fixed-Income-Market

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Fixed Income Market (wallstreetmojo.com)

Example of Fixed Income Securities

Suppose A Ltd issue 2-year Bonds with a cost of $200 that pays 3% interest annually.

So, here investors will get $200*3%, i.e., $6 in first-year and ($200*3%+$200), i.e., $206 in 2nd Year.

On the other hand, if an investor invests in treasury billsTreasury BillsTreasury Bills or a T-Bill controls temporary liquidity fluctuations. The Central Bank is responsible for issuing the same on behalf of the government. It is given at its redemption price and a discounted rate and is repaid when it reaches maturity.read more whose face value (Par Value) is $200, then, in that case, investors have to expand less than face value that can be $185. So, here $15 will be treated as Interest or Fixed Income.

Classification

The following are the criteria exist to classify fixed income market: –

Classification of Fixed Income Market

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Fixed Income Market (wallstreetmojo.com)

#1 – Who is the Issuer of Fixed Income Security?

Major Market Sectors like Government Sector, Corporate Sector, and the finance sector issues these securities, and these sectors may have different coupon rates on issuing the bond.

#2 – Creditworthiness of the Issuer

The coupon rate or fixed income is also depending on the creditworthiness of the issuer (Judged by Credit rating Agency). If issuer credit is not good in the market, then definitely coupon rate will be high on the issue of the bond, and if issuer credit is very high, then the coupon rate will be slightly lower than the old lower credit issuer bond.

#3 – What is the Maturity Period?

The maturity Period of fixed income securities is also different for different kinds of securities like money marketMoney MarketThe money market is a market where institutions and traders trade short-term and open-ended funds. It enables borrowers to readily meet finance requirements through any financial asset that can be readily converted into money, providing an organization with a high level of liquidity and transferability.read more bond (Generally, its maturity period exists till 1 year of its Investments) and Capital Market Bond (Its maturity period have more than 1 year).

#4 – In which Currency Securities are Issued

The majority of bonds are issued in Euro and US $.

#5 – Type of Coupon Rate

Fixed Income Securities (Bonds) are issued with 2 types of Coupon Rate, i.e., Fixed Rate of interest and floating rate of interest (It depends on other market-rate moving at the time of paying coupon like LIBOR+ SPREAD OR MIBOR +SPREAD).

Advantages

Disadvantages

Conclusion

The Fixed Income Market is good for both Investor and Borrower because in this market, the investor is getting fixed income with very less risk (risk occurs due to default of the issuer and due to change in the exchange rate), and the borrower also gets a good amount to invest in the business or for expansion of the business. It is different from stock because here borrower acquires money as debt and pay something in return to that debt and principal amount on maturity. Here ownership right is also not transferred to the investor because of its nature of investments.

Recommended Articles

This has been a guide to what is the fixed income market. Here we discuss the classification and example of fixed income market along with types of fixed income securities. You can learn more about from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *