Fixed income security can be defined as the financial obligation of an entity (known as the issuer), which promises to pay a specified amount of money on a pre-specified date. Some of the issuers are Central and State Governments, government related agencies, municipal bodies etc.
Fixed Income Securities can be broadly divided into two categories: debt obligations and preferred stock. The issuer of a debt obligation is usually known as a borrower. The investor who purchases these securities is known as a creditor. The issuer promises to pay interest amount on periodic intervals and principal amount at the end of the period. Fixed income securities that are debt obligations include bonds, mortgage-backed securities, asset-backed securities, and bank loans. Preferred stock represents an ownership interest in a company. A preferred stock holder receives dividend payments and has priority over common stockholders while receiving dividend payment and liquidation. In simple terms, a preferred stock is a kind of equity that has characteristics similar to bonds.
Fixed income securities were once considered to be mere investment products. The intention of the investors was long-term, i.e., to hold the bonds up to maturity and receive the interest periodically and the principal on maturity. In the last few decades the world of financial securities has witnessed a lot of changes. With more and more complex financial income securities entering into the market, it has become a difficult task to predict the future cash flows with certainty. Also, the hold-to-maturity investors are being replaced by institutional investors who are active traders in the fixed income securities markets.