For example, the borrower may have to pay interest at a fixed rate once a year and repay the principal amount on maturity.
For a company to grow its business, it often must raise money – for example, to finance an acquisition; buy equipment or land, or invest in new product development.
In contrast, if a company misses a quarterly dividend to stock (non-fixed-income) shareholders, there is no violation of any payment covenant and no default.
State and local governments issue municipal bonds to finance projects or other major spending initiatives.
Securitized bank lending (e.g. credit card debt, car loans or mortgages) can be structured into other types of fixed income products such as ABS – asset-backed securities which can be traded over-the-counter just like corporate and government bonds.
For example, a retired person might like to receive a regular dependable payment to live on like gratuity, but not consume principal.
This is defined such that if all future interest and principal repayments are discounted back to the present, at an interest rate equal to the gross redemption yield (gross means pre-tax), then the discounted value is equal to the current market price of the bond (or the initial issue price if the bond is just being launched).
The most common examples are US Treasury Inflation Protected Securities (TIPS) and UK Index Linked Gilts.
The most widely traded kinds are: Fixed income securities have risks that may include but are not limited to the following, many of which are synonymous, mutually exclusive, or related: