Understanding Fixed Income Securities

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Interest-bearing securities is the collective term for all forms of interest-bearing or transferring securities (such as bonds or debentures), which are normally long-term debt financing.

Many organizations that manage assets of third parties (eg investment companies) are obliged to invest a large proportion of the managed funds in securities with high credit quality, the choice often falls on fixed-income securities. There are also bonds that contain a higher level of risk and ensure a higher return (interest) promise.

Bonds are issued as bearer security in general, since the simplest tradability is given. The holder of the bond is therefore the creditor. The term fixed refers to the income and not price, which is subject to swings in the market although not as pronounced. The variation in interest rates and corporate credit risk (rating) causes changes in the value of bonds.

The value of a bond is the present value of all expected payments in the future (ie, coupon payments and repayment of par value). This means that the yield of bonds of the same maturity and credit quality, regardless of the coupon is the same, namely, market return plus a premium credit.

The main characteristic of this type of value entails being paid as a debt of the institutions to investors, ie, there is strong financial basis for those who purchase them. Although the price fluctuation risk exists, the investor can choose to keep the debt to maturity, receiving the agreed profits.

Tradable bonds in the bond market, are bought and sold on the basis of their current market value. The bond is considered a low-risk form of investment because it is operated in the event of liquidation, and it is secured depending on the configuration. It is therefore suitable for inexperienced or very risk-averse investors.

Most bonds are each quoted in percent of nominal value. A rate of 101.25 means that the buyer has to pay 101.25% of the nominal amount of the bond purchase (plus any accrued interest). However, there are a few exceptions in relation to the record in nominal currency (eg convertible bonds).

Public bonds are issued by the federal government (such as government bonds and other federal securities), state and local government and public bodies. Federal and state governments finance their deficits in the country via federal public bonds.

Bank bonds and debentures are issued by credit institutions to obtain funding for their medium-and long-term funding in respect of their lending business. Corporate bonds are bearer bonds, and thus a form of financing.

 

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