Fixed-income or bonds refer to the debt issue by a company. When a company wants to borrow money from the public, it will issue bonds. Lenders or investors buy these bonds. These bonds will pay a regular fixed interest through the tenure of the bond. When the bond matures, the company returns the "par" or face value of the bond.
The risks of fixed-income are
- default risk (i.e. the company simply has no money to repay its obligations),
- interest rate risk, when interest rate rises, the bond value decreases in value
- maturity period risk (i.e. the longer the maturity period the greater the sensitivity to interest rate risk)
- Credit risk (i.e. if the company is viewed as less credit worthily, the bond value decreases)
- Foreign currency risk if the bond is denominated in foreign currency
- Liquidity risk (i.e. there may not be sufficient buyer/seller in the market place)
- Non-systematic risk (i.e. company's insider trading, fraud, mismanagement, etc)
Fixed-income portfolio means that the investor invests in many bonds usually through a fund. By investing a large basket of fixed-income, non-systematic risk can be eliminated by the remaining risk remains.
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