Fixed-Income Investment

Fixed-Income Investment

A security in which the return does not vary based on performance. A common example is a bond with a fixed interest rate: the return does not change based on the bond issuer's performance. These investments typically provide a steady return, but have relatively high exposure to inflation risk. To reduce this exposure, some fixed-income investments are linked to an index in which the principal changes, but not the rate of return. For example, an index-linked, fixed-income investment will pay a constant interest rate (e.g. 4%), but the amount in the principal changes according to inflation such that the dollar amount of the return is higher. See also: Coupon, Treasury Inflation Protected Securities, Floating-rate note.

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Fixed-income investment. Fixed-income investments typically pay interest or dividends on a regular schedule and may promise to return your principal at maturity, though that promise is not guaranteed in most cases.

Among the examples are government, corporate, and municipal bonds, preferred stock, and guaranteed investment contracts (GICs).

The advantage of holding fixed-income securities in an investment portfolio is that they provide regular, predictable income.

But a potential disadvantage of holding them over an extended period, or to maturity in the case of bonds, is that they may not increase in value the way equity investments may. As a result, a portfolio overweighted with fixed-income investments may make you more vulnerable to inflation risk.