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 securitiesFixed Income SecuritiesFixed income investment is a type of investment in which the investor receives a fixed and relatively stable stream of income in the form of dividends or interest over a period of time. Companies and governments typically issue fixed investments in the form of debt securities.read more 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.
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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: –
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#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 LIBORLIBORLIBOR Rate (London Interbank Offer) is an estimated rate calculated by averaging out the current interest rate charged by prominent central banks in London as a benchmark rate for financial markets domestically and internationally, where it varies on a day-to-day basis inclined to specific market conditions.read more+ 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, the risk is very low because the return on these securities is not associated with market risks like shares or mutual funds. 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,Insolvency,Insolvency is when the company fails to fulfill its financial obligations like debt repayment or inability to pay off the current liabilities. Such financial distress usually occurs when the entity runs into a loss or cannot generate sufficient cash flow.read more fixed income securities holders will be given priority over other securities holders.
Disadvantages
- Interest Rate Risk: In a 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 factors, the company position will decline, then it will also affect the bond price in the market. The bond priceBond PriceThe bond pricing formula calculates the present value of the probable future cash flows, which include coupon payments and the par value, which is the redemption amount at maturity. The yield to maturity (YTM) refers to the rate of interest used to discount future cash flows.read more 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
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.
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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 –
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