Fixed-Income Security

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What is a Fixed-Income Security

A fixed-income security is an investment that

provides a return in the form of fixed
periodic payments and the eventual return of
principal at maturity. Unlike a variable-income
security, where payments change based on
some underlying measure such as short-term
interest rates, the payments of a fixed-income
security are known in advance.
 BREAKING DOWN
'Fixed-Income Security?
A fixed-income security, commonly referred to as a
bond or money market security, is a loan made by
an investor to a government or corporate borrower.
The borrower, or issuer, promises to pay a set
amount of interest, called the coupon, on a
predetermined basis until a set date. The issuer
returns the principal amount, also called the face
or par value.
Examples of Fixed-Income Securities
Treasury bills are sold by the U.S. government. Corporate
bonds are issued by companies. Municipal bonds are issued
by states, their agencies and subdivisions. A certificate of
deposit (CD) is issued by a bank. Preferred stock pays a
dividend in a set dollar amount or percentage of share value
on a predetermined schedule. Take for example, a 5% fixed-
rate government bond where a $1,000 investment results in
an annual $50 payment until maturity when the investor
receives the $1,000 back. Generally, these types of assets
offer a lower return on investment because they guarantee
income.
 Benefits of Fixed Income

Fixed-income securities generate regular

income, reduce overall risk and protect
against volatility of a portfolio. The securities
can appreciate in value and offer more
stability of principal than other investments.
Corporate bonds are more likely than other
corporate investments to be repaid if a
company declares bankruptcy.
Risks of Fixed-Income Securities
The generally low risk of investing in fixed-income
securities results in typically low returns and slow capital
appreciation. A principal balance may be tied up for a long
time, resulting in lost income by not investing in other
securities. Interest rate fluctuations cause bond prices to
change, potentially resulting in lost income by having
money locked into a lower-interest bond and not being able
to invest in a higher-interest bond. Bonds issued by a high-
risk company may not be repaid, resulting in loss of
principal and interest. Investing in international bonds may
result in losses due to exchange rates fluctuations. For
example, if a U.S. investor owns bonds denominated in
euros, and the euro decreases in value relative to the U.S.
dollar, the investors returns are lowered.
Fixed Income Market
The money market

Short term, highly liquid, low risk

Wholesale trading

The bond market

Long-term, varied liquidity, varied risk

Wholesale and retail trading
what is the Bond Prices

A bond price is the price at which you can

buy or sell a bond. The most usual way of
expressing these prices is to use the current
price as a percentage or the nominal price of
the bond.
 Buying and Selling

If you as an individual buy a bond, you will pay a

little bit more than the price you would get if you
sold the same bond at the same time. This is called
the spread: It's the commission that the financial
system takes for buying and selling.
 Nominal Price
Almost all bonds are issued with a "face" or nominal
value of $100. For a new bond, you are lending $100 to
the issuer, and they promise to pay you back $100 at the
agreed time, plus interest for the interim.

Current Price
The current price is how much must you pay to buy a
secondhand bond. Perhaps you need to pay $90 for a
bond with a nominal value of $100. Maybe there is some
trick to you getting the money in the future; maybe the
bond has a low interest rate.
 What is a 'Bond Yield?

A bond yield is the amount of return an investor

realizes on a bond. Several types of bond yields
exist, including nominal yields which is the interest
paid divided by the face value of the bond,
and current yield which equals annual earnings of
the bond divided by its current market price.
Additionally, required yield refers to the amount of
yield a bond issuer must offer to attract investors.
BREAKING DOWN 'Bond Yield'
When investors buy bonds, they essentially lend bond
issuers money. In return, bond issuers agree to pay
investors interest on bonds throughout their lifetime
and to repay the face value of bonds upon maturity. The
money that investors earn is called yield. Investors do
not have to hold bonds to maturity. Instead, they may
sell them for a higher or lower price to other investors,
and if an investor makes money on the sale of a bond,
that is also part of its yield.
 When Do Bond Yields Fall?
Generally, investors see bond yields fall when
economic conditions push markets toward safer
investments. Economic conditions that might
decrease bond yields include high rates of
unemployment and slow economic growth or
recession. As interest rates increase, bond prices
also tend to fall.
What is the relationship between the
price and the yield of the bond?

Bond prices and bond yields are reversed,

bond yields rise, bond prices fall; on the
contrary, bond yields fall and bond prices
rise.
Bond price = face value * (1+ coupon rate) / (1+ maturity yield)
 Example

Bond prices higher, due to the rate of return is low, such

as 100 yuan maturity 3% interest is ordained, you 101
yuan to buy it, when you get the maturity of 103 yuan,
profit rate of less than 3%, you 102 yuan to buy it, you
still get 103 yuan maturity, yield is lower.
The higher the price you buy, the lower the yield. You'll
have to pay 2 yuan ,if you have to buy it at 105 yuan.
 End of class

Thank you