Fixed income: Assets and Risks

Fixed income investment instruments are debt issues made by states and companies directed to a broad market. They are generally issued by governments and corporate entities of great financial capacity in defined quantities that entail an expiration date.

Fixed income works exactly like a bank loan, but has some peculiarities:

  • The lenders are a lot of investors, who are called bondholders.
  • Debt represented by securities traded on the stock market, so the investor can go to market and sell its stake to recoup their investment quickly.

In exchange for lending their capital, investors receive an interest every certain time, although in fact it is more complicated to determine the rate of profit of this type of instrument since it is required to calculate using mathematical and financial formulas that refer to the purchase of these instruments through a discount offered by the market. Once the acquisition of said instruments at a discount is made, the instrument may be offered at a higher price. For the issuer of the securities, it represents a cheaper source of financing than through the banks, since intermediation is avoided and the risk is shared.

Fixed income assets

Fixed-income assets, also called "bonds", are debt instruments issued by entities such as National, Provincial, Municipal Governments or Private Companies that these sell to other entities or individuals. The bonds grant the owner the right to collect interest and capital in the future, as well as any other right established in the Issuance Prospectus. Its most relevant characteristic is that its profitability, obtained by charging interest, is determined for the entire life of the issue, which does not mean that the interest rate will always be fixed or constant throughout the life of the asset.

Fixed-income assets or bonds usually pay interest on a periodic basis; the contractual interest rate is called "coupon" and in most cases they usually return the capital at maturity (bullet modality), although there are also bonds with a capital amortization program. There are also bonds that do not pay interest coupons, known as "zero coupon" bonds, such as the case of treasury bills and promissory notes of companies in which the return is generated by the difference between the acquisition price and the amortization price of the title.

Fixed-income risk

The fixed term refers to the term of maturity of the obligations and not to the price, which is subject to market fluctuations although not as pronounced as it is with the shares. The variation in interest rates and the credit risk of the companies (rating) causes fluctuations in the value of the obligations.

The fundamental characteristic of this type of securities is that they are granted as a debt of the institutions towards the investors, that is, they have strong financial backing for those who acquire them. Although the risk of price oscillation exists, the investor can choose to maintain the debt until maturity, receiving the agreed profitability in the issue.

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