Fixed income instruments are financial products whose returns (constant or variable) are defined when they are issued. The price, coupons/interim payments and final redemption value are all determined on the issuance date. During the life of the bond, securities will vary according to fluctuations in the interest rates. Fixed-income securities represent a proportional part of a loan to a private enterprise, public institution or government. The owners of the securities become creditors in proportion to their contribution. Fixed income is an ideal investment for savers or investors with a more conservative profile, through its returns and low risk compared to other products of this type.
The great competitive advantage of fixed income as an investment product is that the associated risks are low, as the issuers make specific payments based on the amount and time period. This guarantees a return on the principal invested and, therefore, a percentage return.
The associated risk is low compared to other investments, as we know the return on fixed income instruments from the moment we buy them.
Fixed income returns
We must differentiate between explicit returns and implicit returns or zero coupon.
Explicit fixed income returns
This is the regular payment of interest or coupons to the investor. This might be semi-annual or annual.
Implicit fixed income return or zero coupon
This is the payment resulting from the difference between the price paid by the investor for a financial product and the price assigned to it at maturity. These products usually have a single interest payment at maturity.