Fixed-Income Securities – Definition & Types
Fixed-income securities are financial claims with promised cash flows of fixed amount paid at fixed dates. The most common type of fixed income security is a bond, but there are many examples of fixed-income securities include treasury bills, corporate bonds, and commercial paper.
Types of Fixed-Income Securities
Here’s a list of some common fixed-income securities and how they work:
1. Treasury Securities
Treasury securities are considered one of the safest investments as they are backed by the full credit of the U.S. government. They are divided into three primary categories according to the length of maturity. These are Treasury Bills, Treasury Notes, and Treasury Bonds.
Treasury Bills are short-term securities with five term options: four weeks, eight weeks, 13 weeks, 26 weeks, and 52 weeks.
Treasury Notes are issued with maturities of two, three, five, seven, and 10 years. They pay interest every six months until they mature.
Treasury Bonds are similar to Treasury Notes except that they mature in 30 years. They’re considered as the long bond. They pay a fixed rate of interest every six months.
2. Federal Agency Securities
Federal agency securities are debt instruments issued by federal agencies. These securities are direct obligations of the Federal government agencies or government sponsored agencies such as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
The purpose of these securities is to raise funds for specific government-sponsored programs. They represent the face value of securities held by the Federal Reserve.
3. Corporate Securities
Corporate securities, such as commercial paper, medium-term notes (MTNs), and corporate bonds, are debt instruments issued by public or private corporations to finance their operations. Trading in corporate securities occurs in both dealer and auction markets.
Commercial paper is a short-term debt instrument issued by large banks and well-known corporations for the financing of short-term debt obligations such as payroll, inventories, and accounts payable.
Medium-term notes (MTNs) refers to a note that usually matures within five to 10 years. A corporate MTNs can be offered by a company to investors through a dealer. Investors can select from differing maturities, ranging from nine months to 30 years.
Corporate bonds are debt obligations issued by corporations in order to raise capital to enhance its operations. Investors (the ‘bondholder) who buy corporate bonds are lending money to the company (the ‘bond issuer’) issuing the bond.
4. Municipal Securities
Municipal securities are long-term debt instruments issued by states and local governments to raise money in order to finance public projects such as building schools, roads, hospitals and highways.
An important feature of these bonds is that their interest payments are exempt from federal income tax and generally from state taxes in the issuing state.
5. Mortgage-Backed Securities
Mortgage-backed securities are also debt instruments similar to bonds with cash flows tied to the principal and interest payments on a collection of mortgages.
Mortgage-backed securities are traded on the secondary market. Investors receive periodic payments identical to bond coupon payments.
FINAL WORDS
Fixed-income securities provide investors a return in the form of fixed periodic payments and the eventual return of principal at maturity.
Fixed-income securities have promised payoffs of fixed amount at fixed times. Excluding government bonds, other fixed-income securities, such as corporate bonds, carry the risk of failing to pay off as promised.
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