What Is Fixed Income?
Fixed income securities are investments that provide regular, predictable income payments. The most common type is bonds—loans you make to governments or corporations in exchange for interest payments.
How Bonds Work
When you buy a bond:
- You lend money to the issuer
- The issuer pays you interest (the “coupon”)
- At maturity, you receive your principal back
Key Terms
- Face Value (Par): The amount repaid at maturity, typically £100 or £1,000
- Coupon Rate: The annual interest rate paid on the face value
- Maturity Date: When the bond expires and principal is repaid
- Yield: The effective return based on current price
Types of Fixed Income Securities
Government Bonds
Issued by national governments:
- UK Gilts: British government bonds
- US Treasuries: American government bonds
- Generally low risk: Backed by government
- Various maturities: Short, medium, long-term
Corporate Bonds
Issued by companies:
- Investment Grade: Higher quality, lower yield
- High Yield: Lower quality, higher yield
- Secured/Unsecured: Asset-backed or not
- Industry variety: Across all sectors
Municipal Bonds
Issued by local governments:
- Fund local projects
- Often tax-advantaged
- Generally stable
Understanding Bond Prices
Bond prices move inversely to interest rates:
| Interest Rates | Bond Prices |
|---|---|
| Rise ↑ | Fall ↓ |
| Fall ↓ | Rise ↑ |
Why This Happens
If you hold a 3% bond and new bonds offer 4%, your bond becomes less attractive. Its price falls until its effective yield matches the market.
Yield Calculations
Current Yield
Current Yield = Annual Coupon / Current Price × 100Example: £5 coupon on a bond priced at £95 = 5.26% yield
Yield to Maturity (YTM)
The total return if held to maturity, accounting for:
- Coupon payments
- Price difference from par
- Time to maturity
Credit Ratings
Agencies rate bond issuers by creditworthiness:
| Rating | Meaning | Risk |
|---|---|---|
| AAA/Aaa | Highest quality | Lowest |
| AA/Aa | High quality | Very low |
| A | Upper medium | Low |
| BBB/Baa | Medium grade | Moderate |
| Below BBB | Speculative | Higher |
Benefits of Fixed Income
1. Predictable Income
Regular coupon payments provide steady cash flow—ideal for:
- Retirement income
- Regular expenses
- Portfolio stability
2. Capital Preservation
At maturity, you receive face value back (assuming no default).
3. Diversification
Bonds often move differently from equities, reducing overall portfolio volatility.
4. Lower Volatility
Typically less price movement than stocks.
Risks to Consider
- Credit Risk: Issuer may default
- Interest Rate Risk: Prices fall when rates rise
- Inflation Risk: Fixed payments lose purchasing power
- Liquidity Risk: May be hard to sell some bonds
- Call Risk: Issuer may repay early
Accessing Bond Markets
Primary Market
Buy new issues directly:
- Government bond auctions
- Corporate bond offerings via platforms like RetailBook
- Often better pricing than secondary market
Secondary Market
Buy existing bonds:
- Through brokers
- Bond ETFs for diversification
- Bond funds for professional management
Summary
Fixed income provides predictable returns and portfolio stability. Understanding the relationship between yields, prices, and risk helps you select appropriate bonds for your investment goals.
