When a government, or a company, needs capital, it can issue debt securities and fixed income instruments (like bonds) to raise the necessary funds.
When you buy bonds and other fixed income products, or hybrid securities, you’re lending money to the issuer (the government or the company that issues the bond). They then agree to pay you interest in return for the loan, until the maturity date. The riskier the loan is (the more doubt there is that the issuer can repay the debt) the more fixed income investors (bond holders / security holders) benefit from higher interest payments (coupon rates). The higher the risk, the more the company must pay in interest (the coupon rate) to secure the loan.
Can you sell a bond before the maturity date?
Selling a fixed income product or bond before it matures means you’ll get market value instead of face value.
Market value can be lower or higher than face value and is influenced by:
- Credit risk of the issuer
- Level of liquidity
- Interest rate movements
- Maturity Date
What are the different types of fixed income investments?
A government or treasury bond refers specifically to a bond (that acts as a loan) issued by governments. As an investment product second only to cash at the bottom of the risk spectrum, they have very low-risk attached and low but predictable yields.
A corporate bond is a bond issued by a corporation or private company.
These bonds are more risky than government bonds, which means they generally pay a higher rate of interest than government bonds.
There are many other fixed income products (securities) that act in a similar fashion to bonds, in that they provide predictable coupon payments and a set maturity date.
Market-linked securities, hybrid securities and bond linked securities are just a few examples of other fixed income instruments.
Looking to speak to an investment adviser about how fixed income securities work?
*Data accurate as at 06.12.2024
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