Fixed-Income Security

The name comes from the predictable payments these securities make. The investor knows in advance how much interest will be paid and when, as long as the issuer does not default.

Fixed-income securities include government bonds, corporate bonds, municipal bonds, treasury bills, certificates of deposit and some types of preferred stock. Some pay interest at a fixed rate; others, despite the name, pay a rate that adjusts with a benchmark.

Investors use fixed-income securities to earn steady income, to preserve capital and to reduce the overall volatility of a portfolio, since their prices generally move less than share prices.

For example, a retiree might hold a mix of government and corporate bonds that pay interest every six months to provide predictable income.

Fixed-income securities still carry risks. Interest rate risk means prices fall when market rates rise. Credit risk is the chance the issuer cannot pay. Inflation risk is the possibility that rising prices erode the real value of the fixed payments.