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What is a Fixed Income Market?

Jim B.
Jim B.

The fixed income market refers to the market in which investors give out loans to institutions such as the government, banks, or corporations. In return, the investors are paid back their principal at the end of the term of the loan and also receive regular interest payments from the institutions in question. This fixed income market is typically called the bond market, because bonds are the primary instruments used in this market. Investors assume risk depending on the reliability of the bond, as the institution could default on the bond and leave the investor nothing in return.

Institutions needing to raise money often turn to investors to provide those funds. In many cases, the institution looking for such capital may not be publicly traded and therefore can't turn to the open market for funding. Such institutions may issue bonds to investors to raise the necessary capital, and these issuances make up the fixed income market. It is so named because investors generally know the amount of return that they will get at the start of the agreement.

Man climbing a rope
Man climbing a rope

Typically, bonds are loans issued from investors to institutions like state or local governments or corporations. In the beginning of the bond agreement, the institution issuing the bond promises the investor an interest rate for the course of the bond term. These interest payments are made to the investor throughout the course of the bond. At the conclusion of the bond, the investor also gets back the principal of the loan as well as any remaining interest.

Investors who participate in the fixed income market are generally concerned with the bond yield. The bond yield is a measurement of how much the investor can expect to get from the investment. This amount depends on the type of institution issuing the bond. For example, government bonds typically offer a very low yield, while certain corporate bonds offer much higher bond yields. It is important to note, though, that a projected bond yield is no guarantee that the investor will see this return.

When an investor takes part in the fixed income market, he assumes a certain amount of risk. Generally speaking, government bonds are usually very reliable, while some corporate bonds may have to offer high yields to offset their low bond rating. A bond rating is a measurement made by credit companies to depict the reliability of the institutions issuing bonds. If a corporation has a low bond rating, it means that this corporation is at a high risk of defaulting on the bond, in which case the investor would see no return on her investment.

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