Introduction to Fixed Income Investing

What is a Fixed Income?

Fixed Income is another term for the bond market. While it may sound obscure, the bond market is critical in establishing the price of borrowing and lending to governments, corporations, and consumers. The interaction of bond prices, bond yields, inflation, and creditworthiness is fundamental to interest rate setting.

Fixed Income refers to the borrowing and lending of assets from one party to another. Bonds, or fixed Income, are tradable "I owe you" notes. 

The fixed-income market is the world's largest financial market. Globally, there were about $119 trillion in traded bonds by the end of 2021. The bond market dwarfs the international stock market, valued at about $93.6 trillion in 2020. (see Wikipedia "Market capitalization", 2022). 

The bond market emerged due to postwar interest rate deregulation and the relaxation of capital constraints, which made it easier for governments to borrow. 

To further understand bonds, let us compare them to stocks. When you buy the shares of a company, you become an owner of the company and are entitled to any dividends declared and paid by the firm. On the other hand, when you purchase a bond, you do not acquire ownership of the firm or issuer like the government.

You will only get the bond's interest and principle, regardless of how lucrative the firm or economy develops or how high its stock price or currency rises. However, even if a corporation gets into financial problems, it is still required by law to make regular interest and principal payments.

This educational section for the fixed-income market aims to help you understand some of the below topics about bonds: 

• How did the bond market come into being?
• The key factors that drive bond prices.
• The role of central bankers in setting interest rates.
• An overview of the yield curve.
• How and why the yield curve moves.

In the process, you will:

• Learn how the bond market developed to be the world’s largest and most intricate market and how it serves an important public role.
• Understand how government bond rates serve as yardsticks against which all other investments are assessed.
• Understand how the bond market forces governments to be disciplined.
• Learn why, when, and how central banks set interest rates.
• Understand how creditworthiness, inflation, and central bank interest rates influence bond valuation.
• Understand the significance of the yield curve to all governments, enterprises, and consumers.
• Interpret the significance of the yield curve’s four fundamental movements.