Fixed Income Assets

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Jason Young

Fixed Income assets refer to assets that provide their owners with a fixed stream of income. Bonds are the most common example of a fixed income asset. Companies and government entities will issue bonds or IOUs to investors. These bonds typically pay a fixed rate of interest or coupon rate to investors for a fixed period of time, thus the name fixed income. At the end of the period, the investor receives his principal (the orginal amount of money paid for the bond).

Ratings and Risk

Fixed income assets typically receive ratings from major ratings agencies. These ratings signify the amount of risk represented by the assets. For instance a U.S. treasury bond which is considered to be one of the safest investments, carries a AAA rating, some states likewise carry high ratings. The higher the rating of the bond issuer, the lower the rate of interest required by the purchasers. A smaller, less established company, for instance, might only have a rating of BBB, and would have to pay bond investors significantly higher annual interest rates. Bonds with exceptionally low ratings are known as junk bonds and typically pay the highest interest rates--sometimes in the double digits.

Equities vs. Bonds

Equities and bonds are the two major asset classes available to investors. While there are others (real estate, private equity, and venture capital) these two classes are very common and extremely liquid (can be converted to cash easily). Equities are typically considered to be the riskier of the two asset types (with the exception junk bonds and other lowly rate bonds) and have traditionally generated higher returns than fixed income assets.

Returns

Fixed income assets historically have had a much lower rate of return than stocks (equities). This is because with

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