Fixed Income Overview

What is fixed income? 

Fixed income is an umbrella term that refers to financial instruments that pay investors fixed interest or dividend payments until its maturity date - these rates are known in advance. These securities are typically of low risk which in turn pays back low reward. When the maturity date is reached investors are paid back the principal amount they had invested. This is in contrast to equities that may pay no return to investors, or variable-income securities, where payments can change based on some underlying measure like interest rates. 

Government and corporate bonds - typically seen as much safer investments - are common examples of fixed income products. Were a company to become bankrupt, fixed income investors are often paid before common stockholders. 

Fixed income instruments are typically recommended to those who are more conservative and tend to be more risk averse. 

What are the types of fixed income products? 

The list below provides a non-exhaustive list of fixed income products:

Money Market Funds

These funds are limited to companies and financial institutions that lend or borrow in amounts ranging from $5 million to well over $1 billion per transaction. The Net Asset Value is of such funds are intended to stay at $1 - this prevents the 'buck from breaking' (when money market investment funds do not cover operating expenses or investment losses).

Money Market Accounts

These are a type of savings account that pay interest, often at a higher rate than savings accounts, but often come with a penalty attached if an individual wishes to take money out of an account. Due to a flattening yield curve and an era of low interest rates the difference in interest rates have narrowed substantially in more contemporary times. 

Certificates of Deposits

Most CDs are not strictly money market funds as they are often sold with terms up to 10 years. But since there are CDs with terms as short as 3 - 6 months this can be seen to be part of the money market. CDs are products offered by financial institutions to customers who agree to leave a lump-sum deposit untouched for a pre-determined period of time. These typically give higher returns than savings and money market accounts. 

Commercial Paper

The commercial paper market is a market that trades unsecured loans for corporations in need of a short-term cash injection. Only highly creditworthy companies can participate so risks tend to be low. 

Repurchase agreement (AKA Repo)

A repo is the equivalent of a short term collateralized loan. The owner of a marketable security would sell these securities for cash - and then agree to purchase back the security at a later date, usually at a higher price than he/she sold it for. The spread between the two prices is equivalent to interest.