Fixed Income Market (Definition, Examples)

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 income 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 issued with a maturity period of one to twelve months. This security not offer any Interest or Coupon or a regular basis but offer a discount at the time of the Issue.

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 2^nd Year.

On the other hand, if an investor invests in treasury bills 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

Following are the criteria exist to classify fixed income market: –

#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

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 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?

Maturity Period of fixed income securities is also different for different kinds of securities like money market bond (Generally its maturity period exists till 1 year of its Investments) and Capital Market Bond (It’s 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

Regular Income: Fixed income securities will provide fixed income on a regular basis like monthly, quarterly, half-yearly or yearly. In this securities, an investor knows what he will get on his investment and when he will get.
Less Risk: In fixed income securities risk are very low because the return on these securities is not associated with market risks like shares or mutual fund. Therefore, it is useful to those investors who do not want to take a risk.
Priority at the Time of Liquidation: In case of liquidation or insolvency, fixed income securities holders will be given priority over other securities holders.

Disadvantages

Interest Rate Risk: In fixed income market, interest rate risk will arise when the interest rate in the market increase but the investor will not get the benefit of the same because he will get the same amount of interest on which he has invested funds.
Credit Risk: In the case of corporate bonds if due to internal or external factor company position will decline then it will also affect the bond price in the market. The bond price will also decrease and if any bondholder wants to sell his instrument before its maturity then he has to sell the instrument at a lower value or there may be a chance that he will face difficulty in sell.
Inflation Rate: If the inflation rate is high than fixed income securities, in such a case fixed income market securities are not advisable because the investor will get the fixed income which will not match with inflation.

Conclusion

Fixed Income Market is good for both Investor and Borrower because in this market investor is getting fixed income with very less risk (risk occurs due to default of issuer and due to change in the exchange rate) and 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 principle amount on maturity. here ownership right is also not transferred to the investor because of its nature of investments.