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fixed-income-instruments
Fixed-income instruments are investments that provide a fixed or predictable stream of
income to the investor. When you buy a fixed-income instrument, you are essentially
lending money to an issuer (a government or corporation) in exchange for regular interest
payments and the return of your principal at a specified maturity date. They are a core
component of a diversified portfolio, especially for investors seeking stability and regular
income.
How Fixed-Income Instruments Work
Principal (Face Value)
This is the original amount you lend to the issuer. You get this amount back on the maturity date.
Coupon Rate
This is the fixed interest rate the issuer pays you on the principal. Payments are typically made annually or semi-annually.
Maturity Date
The specific date when the issuer repays the principal and all interest payments have been made.
For example, if you buy a ₹1,000 bond with a 5% coupon and a 10-year maturity, you’ll
receive ₹50 in interest each year for 10 years. At the end of the 10th year, you’ll receive the
final ₹50 interest payment plus the original ₹1,000 principal.
Types of Fixed-Income Instruments
Fixed-income instruments come in many forms, each with different characteristics, risks,
and returns.
• Bonds: The most common fixed-income instrument.
Government Bonds: Issued by national or state governments. They are
considered very safe as they are backed by the government’s ability to tax.
o Corporate Bonds: Issued by companies to raise capital. They generally offer
higher interest rates than government bonds to compensate for a higher risk
of default.
o Municipal Bonds: Issued by local governments for public projects. The
interest earned on these bonds can sometimes be tax-exempt.
• Fixed Deposits (FDs): Offered by banks, FDs are a safe and popular way to save
money for a fixed period at a guaranteed interest rate.
• Certificates of Deposit (CDs): Similar to FDs, CDs are offered by banks and credit
unions. They require you to lock up your money for a set period in exchange for a
fixed interest rate.
• Money Market Instruments: Short-term debt securities with maturities of less than
a year. They are highly liquid and low risk. Examples include Treasury Bills and
• Debt Mutual Funds: These funds pool money from investors to invest in a portfolio
of various fixed-income securities. They offer diversification and professional
management.
Key Risks
Inflation Risk
The risk that inflation will erode the purchasing power of your fixed interest payments. For example, if your bond pays 5% interest but inflation is 8%, you're losing money in real terms.
Interest Rate Risk
This is the most significant risk. When market interest rates rise, the value of existing bonds with lower coupon rates falls, because new bonds are more attractive. This means you could lose money if you sell your bond before maturity. The longer the maturity of a bond, the more sensitive it is to interest rate changes.
Credit Risk (Default Risk)
This is the risk that the issuer of the bond may not be able to make its interest payments or repay the principal. Government bonds have almost no credit risk, while corporate bonds' risk depends on the company's financial health.
Liquidity Risk
Some bonds can be difficult to sell quickly at a fair price in the secondary market, especially if they are from a smaller, less well-known issuer.
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