Fixed Income

A type of investing or budgeting style for which real return rates or periodic income is received at regular intervals at reasonably predictable levels. Fixed-income investments seek to provide a regular, stable income stream. Investor who live on set amounts of periodically paid from fixed income may face the risk that inflation will erode their spending power. Fixed-income investors receive set, regular payments that face the same inflation risk.

A common type of fixed-income security is the bond; bonds are issued by federal governments, local municipalities or major corporations. Because bonds behave independently from equities, adding fixed income investments to a portfolio can improve its overall diversification.

Relative performance in fixed income is largely driven by two dimensions: bond maturity and credit quality. Bonds that mature farther in the future are subject to the risk of unexpected changes in interest rates. Bonds with lower credit quality are subject to the risk of default.