Fixed-Income Investing

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on May 24, 2023

What Is Fixed-Income Investing?

Fixed-income investing refers to the process of allocating capital to various types of fixed-income securities, such as government and corporate bonds, which provide a steady stream of income through interest payments.

This form of investing is typically considered less risky than equity investing, as fixed-income securities usually offer a more predictable income stream and lower price volatility.

Including fixed-income investments in a diversified portfolio can help investors manage risk, generate stable income, and balance the potential for capital appreciation with the need for capital preservation.

Fixed-income securities can serve as a hedge against market volatility and provide a safety net during economic downturns.

Fixed-income securities share several common characteristics, such as a fixed interest rate or coupon, a maturity date, and a par value. These features can help investors predict the income generated by fixed-income investments and evaluate their risk-reward profile.

Types of Fixed-Income Securities

Government Bonds

Treasury Bonds

Treasury bonds are long-term debt securities issued by the U.S. government. They are considered one of the safest fixed-income investments, as they are backed by the full faith and credit of the U.S. government. Treasury bonds typically have maturities ranging from 10 to 30 years.

Municipal Bonds

Municipal bonds are debt securities issued by state and local governments to finance various public projects, such as infrastructure improvements and public facilities.

These bonds offer tax advantages, as their interest payments are usually exempt from federal income taxes and, in some cases, state and local taxes.

Corporate Bonds

Investment Grade Bonds

Investment grade bonds are debt securities issued by corporations with high credit ratings, indicating a lower risk of default. These bonds typically pay a lower interest rate compared to high-yield bonds due to their lower credit risk.

High-Yield Bonds

High-yield bonds, also known as junk bonds, are debt securities issued by corporations with lower credit ratings, indicating a higher risk of default. These bonds offer higher interest rates to compensate investors for the increased credit risk.

Asset-Backed Securities

Mortgage-Backed Securities

Mortgage-backed securities (MBS) are fixed-income investments backed by a pool of residential mortgages. These securities provide investors with exposure to the residential housing market and offer regular interest payments based on the mortgage interest rates.

Collateralized Debt Obligations

Collateralized debt obligations (CDOs) are fixed-income securities backed by a pool of various debt instruments, such as corporate bonds, mortgage-backed securities, and other asset-backed securities.

CDOs allow investors to gain exposure to a diversified pool of debt instruments and can offer varying levels of risk and return based on the underlying assets.

Preferred Stocks

Preferred stocks are hybrid securities that combine features of both stocks and bonds. They pay regular dividends and have a higher claim on a company's assets and earnings compared to common stocks.

Preferred stocks can provide investors with a stable source of income while offering some potential for capital appreciation.

Fixed-Income Mutual Funds and Exchange-Traded Funds (ETFs)

Fixed-income mutual funds and ETFs offer investors a diversified portfolio of fixed-income securities through a single investment.

These funds can provide exposure to various types of fixed-income investments, such as government and corporate bonds, and asset-backed securities, and can be tailored to match specific investment objectives, such as income generation, capital preservation, or inflation protection.

Factors Affecting Fixed-Income Investments

Interest Rates

Relationship Between Bond Prices and Interest Rates

Bond prices and interest rates have an inverse relationship, meaning that when interest rates rise, bond prices fall, and vice versa.

This relationship is crucial for fixed-income investors, as changes in interest rates can directly impact the value of their bond holdings and the overall performance of their fixed-income portfolios.

Duration and Interest Rate Risk

Duration is a measure of a bond's sensitivity to changes in interest rates. Bonds with longer durations are more sensitive to interest rate fluctuations, which can lead to higher price volatility.

Fixed-income investors should consider a bond's duration when evaluating interest rate risk and selecting securities that align with their risk tolerance and investment objectives.

Credit Quality

Credit Ratings

Credit ratings are assessments of a bond issuer's creditworthiness, which can help investors gauge the likelihood of default.

Credit rating agencies, such as Standard & Poor's, Moody's, and Fitch Ratings, assign credit ratings based on factors such as the issuer's financial strength, business stability, and ability to meet its debt obligations.

Fixed-income investors should consider credit ratings when selecting bonds to ensure they are comfortable with the associated credit risk.

Default Risk

Default risk refers to the possibility that a bond issuer will fail to make timely interest payments or repay the principal at maturity.

Default risk varies across different types of fixed-income securities, with government bonds typically having lower default risk compared to corporate bonds and high-yield bonds having higher default risk compared to investment-grade bonds.

Fixed-income investors should assess default risk when selecting bonds and diversify their portfolios to mitigate potential losses from bond defaults.


Inflation-Protected Securities

Inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS), are designed to protect investors from the eroding effects of inflation on their fixed-income investments.

These securities adjust their principal and interest payments based on changes in inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U).

Impact of Inflation on Fixed-Income Investments

Inflation can negatively impact fixed-income investments by reducing the purchasing power of interest payments and eroding the real value of a bond's principal.

Fixed-income investors should consider the potential impact of inflation on their investments and allocate a portion of their portfolios to inflation-protected securities or other assets that may perform well during inflationary periods.

Economic Conditions and Market Sentiment

Economic conditions and market sentiment can influence fixed-income investments by affecting interest rates, credit quality, and investor demand for different types of bonds.

Fixed-income investors should monitor economic indicators and market trends to better understand the evolving risk-reward profile of their bond portfolios and make timely adjustments to their investment strategies.

Factors Affecting Fixed-Income Investments

Strategies for Fixed-Income Investing


Laddering is a fixed-income investing strategy that involves purchasing bonds with staggered maturity dates, which can help investors manage interest rate risk and provide a steady stream of income.

This approach allows investors to reinvest maturing bonds at potentially higher interest rates, while also mitigating the impact of interest rate fluctuations on their bond portfolios.

Barbell Strategy

The barbell strategy involves investing in short-term and long-term bonds, with little or no exposure to intermediate-term bonds.

This approach can help fixed-income investors balance the stability of long-term bonds with the flexibility and potential for capital appreciation offered by short-term bonds, while also managing interest rate risk.

Bullet Strategy

The bullet strategy involves investing in bonds with similar maturity dates, which can help fixed-income investors focus on a specific investment horizon and manage interest rate risk.

This approach may be suitable for investors with specific income or capital preservation goals that align with the selected bond maturities.

Active vs Passive Management

Fixed-income investors can choose between active and passive management strategies for their bond portfolios. Active management involves selecting individual bonds or fixed-income funds based on research and analysis, with the goal of outperforming a benchmark index.

Passive management involves investing in fixed-income index funds or ETFs that track a specific benchmark, with the goal of replicating the benchmark's performance.

Each approach has its advantages and disadvantages, and fixed-income investors should consider their investment objectives, risk tolerance, and available resources when selecting a management strategy.

Advantages and Disadvantages of Fixed-Income Investing


Stable Income

Fixed-income investments provide a predictable stream of income through regular interest payments, making them suitable for investors seeking a steady source of cash flow to cover expenses or supplement their retirement income.

Lower Volatility

Fixed-income securities generally have lower price volatility compared to equities, which can help investors manage risk and maintain a more stable portfolio value during periods of market turbulence.


Including fixed-income investments in a diversified portfolio can help investors balance the potential for capital appreciation with the need for capital preservation and reduce overall portfolio risk.


Interest Rate Risk

Interest rate fluctuations can negatively impact bond prices, leading to potential capital losses for fixed-income investors. Investors should consider a bond's duration and employ strategies, such as laddering or barbell, to manage interest rate risk.

Credit Risk

Fixed-income investments are subject to credit risk, which refers to the possibility that a bond issuer may default on its interest payments or principal repayment. Investors should consider credit ratings and diversify their bond holdings to mitigate credit risk.

Inflation Risk

Inflation can erode the real value of fixed-income investments by reducing the purchasing power of interest payments and principal repayments.

Investors should consider allocating a portion of their portfolios to inflation-protected securities or other assets that may perform well during inflationary periods.

Advantages and Disadvantages of Fixed-Income Investing

Fixed-Income Investing for Different Investor Profiles

Conservative Investors

Conservative investors, who prioritize capital preservation and income generation over capital appreciation, may allocate a significant portion of their portfolios to fixed-income investments.

Government bonds, investment-grade corporate bonds, and high-quality fixed-income funds can offer conservative investors a stable source of income with lower risk compared to equities.

Income-Oriented Investors

Income-oriented investors seek a high level of current income and may allocate a substantial portion of their portfolios to fixed-income investments with higher yields, such as high-yield bonds, preferred stocks, and dividend-paying equities.

These investors should carefully assess the credit risk associated with higher-yielding securities and maintain a diversified portfolio to manage potential losses.

Growth-Oriented Investors

Growth-oriented investors prioritize capital appreciation over income generation and may allocate a smaller portion of their portfolios to fixed-income investments.

These investors can consider allocating some of their fixed-income exposure to higher-yielding securities, such as high-yield bonds or emerging market debt, to potentially enhance their portfolio's return potential.

Balanced Investors

Balanced investors seek a combination of income generation and capital appreciation, and may maintain a diversified portfolio that includes both fixed-income and equity investments.

These investors can consider a mix of government bonds, corporate bonds, and fixed-income funds to achieve their desired risk-reward profile and investment objectives.


Understanding fixed-income investing is essential for investors seeking to balance their portfolios, manage risk, and generate a stable source of income.

By familiarizing themselves with the different types of fixed-income securities, the factors affecting their performance, and the various investment strategies available, investors can make more informed decisions and better achieve their financial goals.

When selecting fixed-income investments, investors should consider their risk tolerance and investment objectives, as well as the interest rate environment, credit quality, and economic conditions.

By carefully evaluating these factors, investors can construct a fixed-income portfolio that aligns with their financial goals and risk preferences.

Successful fixed-income investing requires ongoing portfolio management and monitoring to respond to changes in market conditions, interest rates, and credit quality.

By staying informed about economic trends and adjusting their fixed-income portfolios accordingly, investors can optimize their risk-reward profile and enhance their investment performance over time.

Fixed-Income Investing FAQs

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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