Fixed-Income Security Definition, Types, and Examples

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A fixed-income security is a debt instrument that pays its holder a return on a set schedule, usually through regular interest payments, and repays the original principal on a stated maturity date. The investor is a lender: a government, company, municipality or bank borrows the money and contractually agrees to the payment terms in advance. Bonds are the best-known example, but Treasury bills, certificates of deposit and savings bonds also fall under the label.

What a fixed-income security is

Issuers sell fixed-income securities to raise capital for a project, a budget gap or business operations. In return, the buyer gets a claim to a defined set of cash flows.

Why debt securities are called “fixed income.” A stockholder’s return depends on dividends the board may raise, cut or skip, and on a share price with no set end value. A bondholder’s return is written into the contract: a stated coupon rate, a payment schedule and a face value due at maturity.

Why they are called “securities.” A security is a tradable financial instrument representing a claim. Bonds and notes can be sold between investors before maturity. Some fixed-income products, such as a standard bank CD or a U.S. savings bond, are not traded on a secondary market but share the same fixed-payment structure.

How fixed-income securities work

Every fixed-income security has a few core terms:

• Face value (par): the principal repaid at maturity, often $1,000 for corporate bonds.
• Coupon rate: the annual interest rate applied to face value. Many bonds pay it semiannually.
• Maturity date: when the principal comes back to the investor.
• Issuer: the borrower whose ability to pay determines credit risk.

Some instruments pay no coupons. Treasury bills are sold at a discount to par, and the investor’s interest is the difference between the purchase price and the face value received at maturity. As a hypothetical example, a $1,000 bill bought for $980 returns $1,000 at maturity, so the investor earns $20.

Interpreting price and yield

The coupon stays the same for the life of a fixed-rate bond (floating-rate bonds are a variation whose coupons reset with a benchmark rate), but the bond’s market price moves with prevailing interest rates. When new bonds offer higher rates, an existing bond with a lower coupon is worth less, so its price drops until its yield matches the market. The reverse happens when rates fall. The return an investor locks in by buying at a given price and holding to maturity is measured by yield to maturity.

Example of a fixed-income security

Hypothetical example. An investor buys a newly issued 10-year corporate bond with a $1,000 face value and a 5% coupon, paid semiannually.

• Each payment: $1,000 × 5% ÷ 2 = $25, made 20 times over 10 years.
• Total coupon income: $500, plus the $1,000 principal at maturity, assuming the issuer does not default.

Now suppose market rates on comparable bonds change right after purchase. Discounting the same 20 payments and the $1,000 principal at the new rate (semiannual compounding):

If the investor holds to maturity, the cash flows are unchanged at $25 per period and $1,000 at the end. The price change matters only if the bond is sold early. A seller at the 6% level would realize a loss of about $74 per bond, while the holder who waits still receives full par.

Types of fixed-income securities

Treasury bills, notes and bonds

U.S. Treasury securities are backed by the full faith and credit of the U.S. government. Their interest is subject to federal income tax but exempt from state and local income taxes.

• Treasury bills (T-bills): mature in four to 52 weeks and are issued at a discount to par.
• Treasury notes (T-notes): mature in two to 10 years, are sold in $100 increments and pay fixed interest every six months.
• Treasury bonds (T-bonds): mature in 20 or 30 years, are also sold in $100 increments and pay semiannual interest.

Municipal bonds

Municipal bonds (munis) are issued by states, cities and other local governments to fund schools, hospitals, highways and other public projects. Their interest is generally exempt from federal income tax and may also be exempt from state and local taxes for residents of the issuing state. Munis are typically issued in $5,000 increments. The tax exemption is worth more to investors in higher tax brackets.

Corporate bonds

Companies issue corporate bonds to finance operations, expansion or capital spending. A bondholder has no ownership stake or voting rights but is entitled to scheduled interest, usually paid every six months. Corporate bonds are grouped by credit quality (investment grade or non-investment grade) and by maturity (short, medium or long term). They generally pay more than Treasuries of similar maturity to compensate for default risk.

Certificates of deposit

CDs are issued by banks and credit unions and require the depositor to leave money in place for a set term, usually in exchange for a higher rate than a savings account. CDs are insured by the FDIC at banks and the NCUA at credit unions, up to $250,000 per depositor, per institution, per ownership category. Withdrawing before the term ends typically triggers an early withdrawal penalty.

U.S. savings bonds

Savings bonds are nonmarketable government securities designed for long-term saving. They earn interest for up to 30 years, can be bought with as little as $25, and their interest is exempt from state and local taxes. The Series I bond pays a combined rate made of a fixed rate plus an inflation rate that resets every six months. Because part of its return floats with inflation, an I bond is a government debt instrument but not fixed income in the strict sense of a constant coupon. Treasury Inflation-Protected Securities (TIPS) work similarly by adjusting principal for inflation.

Preferred stock

Preferred stock is often grouped with fixed income because it pays a set dividend, stated as a dollar amount or a percentage of par. It is still equity: dividends can be suspended if the company runs into financial trouble, and most preferred shares have no maturity date, so there is no scheduled return of principal.

Credit ratings

Rating agencies such as Moody’s, S&P Global and Fitch assess an issuer’s ability to pay. Ratings run from AAA (highest quality) down to D (in default).

• Investment grade: BBB- or higher at S&P and Fitch; Baa3 or higher at Moody’s.
• Non-investment grade (high-yield or “junk”): BB+ or lower at S&P and Fitch; Ba1 or lower at Moody’s.

Lower ratings come with higher yields because investors demand compensation for a greater chance of missed payments.

Why fixed income matters in a portfolio

Investors use fixed income to generate scheduled income, preserve capital for a known future date and reduce overall portfolio swings, since high-quality bond prices typically move less than stock prices. A retiree can match bond maturities to expected spending needs, and a saver can use a CD or T-bill to hold money that will be needed within a year or two.

Investors can hold individual securities or buy a bond fund. Individual bonds have a known maturity date and principal repayment and no ongoing management fee, but building a diversified set requires more capital. A bond fund or bond ETF offers instant diversification and daily liquidity, but it has no maturity date, charges fees, and its share price (tracked through net asset value) moves with rates without any guarantee of getting principal back.

Limitations and risks

• Interest rate risk: rising rates reduce the market value of existing bonds, and longer maturities lose more value for the same rate move. Holding to maturity avoids realizing the loss, but money tied up at a lower rate misses the higher yields now available.
• Inflation risk: fixed payments lose purchasing power every year inflation is positive. This is the main threat to fixed retirement income.
• Credit risk: the issuer may miss interest or principal payments. Treasuries carry the least of it; lower-rated corporate bonds carry the most.
• Liquidity risk: some bonds trade infrequently, and selling before maturity can mean accepting a lower price. CDs and savings bonds may carry penalties or holding requirements.
• Lower expected returns: over long periods, fixed income has generally returned less than stocks in exchange for lower volatility.

The Bottom Line

Fixed income suits investors who want scheduled income, capital set aside for a known date, or steadier portfolio values than stocks provide. Holding a bond to maturity protects the promised cash flows from price swings, but it does not shield them from inflation or issuer default. Matching maturities to spending needs and weighing credit quality, taxes and fund fees helps investors choose between individual securities and bond funds.