Fixed Income

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on December 23, 2022

A fixed-income security is an investment vehicle that pays investors unchanging interest or dividend payments until its maturity date.

Upon maturity, investors are repaid the principal amount invested.

The purpose of fixed-income securities is to provide a steady income stream that is more stable than stocks. Additionally, fixed-income investors are paid before common stockholders in the event that a company goes bankrupt.

Types of Fixed Income

Some common types of fixed interest products are:

  • Government and corporate bonds
  • Fixed-income ETFs
  • Fixed-income Mutual funds
  • Treasury bonds and bills
  • Municipal bonds
  • Certificates of deposit (CDs)

For most investors, fixed-income investments are a common component of a well diversified portfolio. Depending on their investment style, the percent of their portfolio dedicated to fixed-income securities may vary.

For example, a risk-averse investor may choose to invest 60% in fixed-income products and 40% in equities, while a more aggressive investor may have 20% in fixed-income securities and 80% in equities.

Utilizing Fixed Income

One strategy for maximizing the return on investment from fixed-income securities is called laddering. This is where an investor purchases a portfolio of bonds with staggered maturities.

For example, say an investor has $100,000 to invest in fixed-income securities. Instead of buying $100,000 of one-year bonds, they may split the money into fifths and invest $20,000 each into one, two, three, four, and five-year securities.

When the one-year bonds mature, instead of buying more one-year securities, the investor will reinvest in five-year securities. This way, the investor sees cash flow from their investments each year.

Fixed Income FAQs

What is Fixed-Income Security?

Fixed-income security is an investment vehicle that pays investors unchanging interest or dividend payments until its maturity date.

What is the purpose of a Fixed-Income Security?

The purpose of fixed-income securities is to provide a steady income stream that is more stable than stocks.

How does an investor utilize a Fixed-Income Security?

One strategy for maximizing the return on investment from fixed-income securities is called laddering.

Why do investors purchased Fixed-Income Securities?

Most investors purchase fixed-income securities to diversify their investment portfolios.

Why are Fixed-Income Securities more stable than stocks?

Fixed-income investors are paid before common stockholders in the event that a company goes bankrupt.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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