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Fixed Income – What is it, Types, Advantage, Disadvantages, and Example

What is the fixed income?

Fixed income is the set of financial debt assets issued by states, agencies, public and private entities offering the borrower a fixed income as a return for the investment made.

It is made up of various securities such as bonds, bonds, promissory notes, Treasury bills, its profitability being lower than that obtained in equity placements since it is considered a safer investment.

Types of fixed income

According to its issuance, fixed income is classified into:

  • Public fixed income: these are the issuance of securities (bonds, treasury bills, etc.) issued by a state in order to obtain funds from the financial market.
  • Private fixed income: being the second in importance, they are formed by the issuance of debt from private companies in order to finance their activities (expansion, acquisition of equipment, debt repayment, among others).

Advantages and disadvantages of fixed income

Advantage

The advantages of fixed income are:

  • They are relatively low-risk investments.
  • The investor can sell the securities quickly and have the funds available in cash if liquidity is required.
  • It is a fairly agile financial tool to obtain funds from the financial market given its general acceptance.
  • Fixed income funds reduce the volatility and fluctuation of your investment portfolio by diversifying their products through different placements.

Disadvantages

The disadvantages of fixed income are:

  • Their profitability is generally the lowest in the financial market.
  • There is a risk that the issuer of the securities will not be able to meet the disbursements required by the loan.
  • They are exposed to currency depreciation.
  • The financial managers of the loans tend to charge high fees for the administration of the funds.

Fixed income example

Suppose that the government issues 20-year public debt securities with an annual interest of 5% in order to carry out public works, generating genuine employment in the construction sector.

An investor decides to place the US $ 50,000 in these bonds, expecting to receive the corresponding interest at the end of each year and at maturity the total amount of the capital contributed. So you will receive:

  • Year 0: u $ s 50,000 (initial investment).
  • Years 1 to 19: u $ s 2,500 per year (interest of 5%).
  • Year 20: final u $ s 52,500 (u $ s 50,000 principal + u $ s 2,500 interest).
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Ahmed Ismailhttps://www.ipostjournal.com/
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