Fixed income securities


1. What Are Fixed Income Securities?

Fixed income securities are investments that pay regular interest (coupon) and return the principal at maturity.
Common types:

Bonds (corporate, government, municipal)

Treasury bills and notes

Certificates of deposit (CDs)

Mortgage-backed securities (MBS)



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2. Key Terminology You Must Know

Face Value (Par) – The amount paid back at maturity, usually $1,000.

Coupon Rate – The interest rate paid annually/semi-annually on face value.

Yield – Return on the bond, expressed as a percentage.

Maturity – When the principal is repaid.

Price – Bonds may trade at premium (above par) or discount (below par).



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3. Bond Pricing & Yield Relationship

When interest rates rise, bond prices fall (and vice versa).

Yield to Maturity (YTM) – The total return if held till maturity.

Current Yield = Coupon / Current Price



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4. Credit Risk & Ratings

Bonds have credit ratings from agencies like Moody's and S&P.

Investment Grade: Less risky (e.g., AAA, AA)

Junk Bonds: Higher yield but higher risk (e.g., BB, B)


Issuer’s ability to repay is key to credit risk.



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5. Duration & Interest Rate Risk

Duration measures sensitivity to interest rate changes.

Higher duration = more price volatility.

Think of it as the “effective maturity.”


Convexity adds a second layer of interest rate sensitivity (for advanced learning later).



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6. Types of Bonds

Government Bonds: Very low risk (e.g., US Treasuries).

Corporate Bonds: Higher yield, higher risk.

Municipal Bonds: Tax-advantaged in the US.

Inflation-Linked Bonds (e.g., TIPS): Adjust principal with inflation.



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7. Market Participants & Uses

Institutions (mutual funds, pension funds) buy bonds for stable income.

Bonds are used to diversify portfolios, preserve capital, and manage risk.

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