Fixed income securities

Fixed income securities are investment instruments that pay fixed interest or dividend payments over a specific period and return the principal upon maturity. Common examples include bonds, treasury bills, and certificates of deposit (CDs). Let’s address each of your points:


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1. How Buying and Selling Happens

Primary Market:

Fixed income securities are initially issued by governments, corporations, or financial institutions to raise capital.

Investors purchase these directly through auctions (e.g., treasury auctions for government bonds) or from underwriters during the issuance.


Secondary Market:

After issuance, these securities can be bought and sold in secondary markets, either through:

Exchanges: For listed securities like certain corporate bonds.

Over-the-Counter (OTC): Most bond trading happens here via dealers and brokers.


Mechanisms:

Institutional investors (e.g., mutual funds, pension funds) are dominant participants.

Retail investors may buy through brokerage platforms or funds (e.g., bond ETFs).





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2. How Income Works and Is Generated

Fixed income securities generate income through interest payments or coupons:

Coupon Payments: Regular (e.g., semi-annual or annual) interest payments based on the bond’s face value and coupon rate.

Example: A bond with a face value of ₹1,00,000 and a 5% annual coupon pays ₹5,000/year.


Discount Instruments: Zero-coupon bonds (e.g., Treasury bills) are sold at a discount to their face value, and the difference is the investor’s income.

Example: Buy at ₹95,000; redeemed at ₹1,00,000 upon maturity; ₹5,000 is the income.



Additional Income:

If sold before maturity, capital gains or losses may occur depending on market price changes.




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3. How Pricing Happens Daily

Fixed income security prices fluctuate daily based on market conditions, determined by several factors:

Interest Rates:

If market interest rates rise, the price of existing fixed income securities falls (and vice versa).

Example: A bond with a 5% coupon is less attractive if new bonds offer 6%, so its price will decrease.



Credit Risk:

If the issuer’s credit rating improves, the bond price rises (lower risk), and vice versa.


Demand and Supply:

Market activity affects pricing. High demand for bonds pushes prices up.


Remaining Time to Maturity:

As the maturity date approaches, the bond price converges toward its face value.


Macroeconomic Factors:

Inflation expectations, central bank policies, and geopolitical events impact pricing.


Quoted Prices:

Bonds are often quoted as a percentage of face value.

Example: A price of 98.5 means the bond is trading at 98.5% of its face value.

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