Fixed income securities

Definition

Fixed income securities are financial instruments that provide returns in the form of regular, fixed payments and the eventual return of principal at maturity. These securities, such as bonds, are typically less volatile than equities and are a popular investment choice for those seeking steady income streams, especially in the context of international mutual funds and ETFs.

5 Must Know Facts For Your Next Test

1. Fixed income securities can be issued by various entities, including governments, municipalities, and corporations, making them available in different forms such as treasuries, municipal bonds, and corporate bonds.
2. Investing in international mutual funds and ETFs that include fixed income securities allows investors to diversify their portfolios geographically while potentially reducing overall risk.
3. The market for fixed income securities is influenced by interest rates; as rates rise, the prices of existing bonds typically fall, creating a negative correlation.
4. Fixed income securities can be attractive during periods of economic uncertainty as they often provide a stable source of income and help preserve capital.
5. Credit ratings assigned to issuers of fixed income securities play a crucial role in determining their risk level and impact investor decisions regarding which securities to include in portfolios.

Review Questions

• How do fixed income securities contribute to portfolio diversification within international mutual funds and ETFs?
  • Fixed income securities offer a stable source of returns that can counterbalance the volatility associated with equities. When included in international mutual funds and ETFs, these securities provide exposure to different markets and economies. This diversification helps investors spread risk across various asset classes and regions, making it easier to manage overall portfolio volatility while seeking consistent returns.
• Evaluate the impact of interest rate fluctuations on the performance of fixed income securities within global investment strategies.
  • Interest rate fluctuations significantly impact the performance of fixed income securities since rising rates lead to declining prices for existing bonds. In global investment strategies, this means that fund managers must actively manage interest rate risk by adjusting their holdings based on anticipated movements in interest rates. A well-diversified portfolio may mitigate some of this risk, but understanding how changes in rates affect different types of fixed income assets is crucial for maintaining investment performance.
• Synthesize the role of credit ratings in influencing investor decisions related to fixed income securities in international markets.
  • Credit ratings serve as essential indicators of creditworthiness for issuers of fixed income securities, impacting investor confidence and demand. In international markets, high-rated bonds may attract risk-averse investors looking for stable returns, while lower-rated options may appeal to those seeking higher yields despite increased risks. This dynamic creates a complex landscape where investors must weigh potential returns against credit risks when selecting fixed income investments across diverse global contexts.

Related terms

Bonds: Debt instruments issued by governments or corporations to raise capital, where investors lend money in exchange for periodic interest payments and the return of principal at maturity.

Yield: The income return on an investment, typically expressed as a percentage of the investment's cost or current market value, and is a crucial factor in evaluating fixed income securities.

Duration: A measure of the sensitivity of the price of fixed income securities to changes in interest rates, which helps investors assess interest rate risk.