We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What are Fixed Income Derivatives?

John Lister
Updated May 17, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Fixed income derivatives are financial investments that have a value deriving from another assets. Strictly speaking, the income amount from those investments is not always fixed. Instead, it can vary with interest rates or inflation, and carries a risk of default. Common fixed income derivatives include credit default swaps and interest rate swaps.

The name fixed income derivatives can easily cause confusion. To understand it, it's necessary to appreciate two points about the concept. The first is that the derivative itself does not necessarily have a fixed income. Instead, the derivative is based on a fixed income asset. The people involved in the derivative do not have any direct interest in the fixed income asset; rather, they exchange money based on the value of that asset. One way to comprehend this is to liken the arrangement to a wager on a sports game: the gamblers have no involvement in the game or the final score, but do exchange money based on the score.

The other confusion comes with the nature of the fixed income assets. This does not necessarily mean the amount of payment is either fixed or guaranteed. Instead, it means that the holder of the asset receives a regular payment, rather than only making money by selling the asset at a profit. This payment amount could vary, for example with an inflation-linked bond. Investors considering the value of a fixed income asset and associated derivatives must also take into account the risk that the issuer will default on making payments.

There are two main forms of fixed income derivatives. The first is an interest rate derivative, which is where the payments between the two parties in the agreement are related to some form of interest rate. The simplest example is an interest rate swap, which involves both parties agreeing to pay the other a hypothetical interest payment on a hypothetical loan amount. While one party pays on an interest rate fixed when the deal is made, the other party pays based on the actual market interest rate on the agreed payment date. In effect, therefore, the two sides are making a wager about future interest rate movements.

The other main class of fixed income derivatives is credit derivatives. In effect, this is an agreement between two investors who make a wager about whether a particular borrower will default on a particular loan or other credit agreement. Originally, this type of deal involved the lender taking out a derivative that would pay out if the borrower didn't repay, effectively making it an insurance policy. As of 2011, the market for credit derivatives has grown such that the two parties involved may have no connection to the loan or credit agreement itself.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
John Lister
By John Lister
John Lister, an experienced freelance writer, excels in crafting compelling copy, web content, articles, and more. With a relevant degree, John brings a keen eye for detail, a strong understanding of content strategy, and an ability to adapt to different writing styles and formats to ensure that his work meets the highest standards.
Discussion Comments
John Lister
John Lister
John Lister, an experienced freelance writer, excels in crafting compelling copy, web content, articles, and more. With...
Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.