As a broad area of investment, fixed income deals with investments that pay a predetermined - or fixed return.

For example, bonds, bills or notes, all of which pay a percentage of the stated face value.

Contrast this known - or fixed - return with the risk faced by the typical stock market investor.
Despite their guaranteed income, you can still lose money in the bond market. Prices of bonds vary just like stocks do, but depending on prevailing interest rates. As interest rates (and thus expected yields) go up, bond prices go down. With bonds of course you can lock in a yield just by holding on to it until maturity (assuming the issuer doesn't default), but that way you can end up with an unfavourable yield if interest rates rise - and a capital loss if you sell. Most people dealing in long bonds aren't intending to hold them for twenty years - they hope for interest rates to drop at some point to below the rates prevailing when they purchased them, so they can sell for a capital gain. Many people aren't particularly interested in the income side at all, and purchase stripped bonds with no coupon payments, as they tend to be priced to offer a greater return. Eet's not so seemple, you see.

go back to my big ol' financial metanode

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