Fixed Income Market

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is a Fixed Income Market?

Fixed Income Market is a market that trades fixed income securities like government bonds, corporate bonds, and treasury bills. In this market, the investors receive a regular income – on a monthly, quarterly, half-yearly, or yearly basis – and repayment of principal amount on maturity.

Key Takeaways

  1. A fixed income market refers to a market where fixed income securities are traded such as government bonds, T-bills, corporate bonds, etc.
  2. There are various types of fixed income securities such as bonds, money market instruments, treasury bills, etc.
  3.  There lies a criterion for the existence of a fixed income market such as who issues the fixed income securities, the creditworthiness of the issuer, the maturity period, types of coupon rates, etc. 
  4. Fixed income markets benefit investors in ways of regular income, less risk, and liquidation. A few disadvantages of fixed income markets are credit risk, inflation rate, interest rate risks, etc.

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.

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#1 – Bonds

Bonds are issued by the corporate and government to finance the business for expansion. If an investor invests in a bond, they will receive a regular 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, called “Coupon Payment,” and will get the principal amount on the bond’s maturity.

#2 – Treasury Bills

It is also a fixed-income security issued by the federal government with a maturity period of 1-12 months. This security does not offer any interest or coupon regularly but a discount at the time of the issue.

Fixed-Income-Market

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Example of Fixed Income Securities

Suppose A Ltd. issues 2-year bonds with $200 that pays 3% interest annually.

So, investors will receive $200*3%, i.e., $6 in the first year and ($200*3%+$200), i.e., $206 in the second year.

On the other hand, if an investor invests in treasury billsTreasury BillsTreasury Bills (T-Bills) are investment vehicles that allow investors to lend money to the government.read more whose face value (par value) is $200, investors will have to invest less than the face value of $185. 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

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

Government, corporate, and the finance sector can issue these securities. These sectors may have different coupon rates on issuing the bond.

#2 – Creditworthiness of the Issuer

The coupon rateCoupon RateThe coupon rate is the ROI (rate of interest) paid on the bond's face value by the bond's issuers. It determines the repayment amount made by GIS (guaranteed income security). Coupon Rate = Annualized Interest Payment / Par Value of Bond * 100%read more or fixed income depends on the issuer’s creditworthiness (judged by a credit rating agency). If issuer credit is poor in the market, the coupon rate will be high on the bond issue. On the other hand, if the issuer credit is good, 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 different for different securities like money marketMoney MarketThe money market is a financial market wherein short-term assets and open-ended funds are traded between institutions and traders.read more bonds (maturity period till one year of the investment) and capital market bonds (maturity period more than one year).

#4 – In which Currency Securities are Issued

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

#5 – Type of Coupon Rate

Fixed income securities (bonds) are issued in two types of coupon rate, i.e., fixed rate of interest and floating rate of interest (it depends on market rates 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

Disadvantages

Conclusion

The fixed income market is suitable for both Investors and Borrowers because. In this market, the investor gets fixed income with significantly less risk (risk occurs due to default of the issuer and due to change in the exchange rate) and the borrower gets a good amount to invest in the business for expansion. It is different from stocks because here the borrower acquires money as debt and pays something in return for that debt and principal amount on maturity. The ownership right is also not transferred to the investor because of the nature of investments.

Frequently Asked questions (FAQs)

Are fixed income securities liquid?

When a bond is deemed to be liquid, a market of investors actively buying and selling that type of bond is typically present. Larger issuance from reputable companies and Treasury bonds are typically more liquid.

Who should invest in fixed income securities?

Fixed income securities are ideal for people looking for safe and stable investments. It can also be chosen by avid investors to secure returns and diversify their portfolios as they receive a stable source of dividends.

What is the difference between equity and fixed income securities?

Investors can purchase and trade financial assets that fall under the categories of equity and fixed income. Shares of stock are often referred to as equity, although corporate and government bonds are typically included in fixed income.

How are fixed income markets regulated in India?

The fixed income market in India is jointly regulated by RBI & SEBI. The fixed income market in India is mostly dominated by banks and other institutions. Retail investors’ participation is almost negligible.

Recommended Articles

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

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